Why the stock market rally may be coming to an end.

There’s reason for the market excitement. Economic data, such as retail sales last week, continue to point to modest growth, but inflation expectations and interest rates remain below multi-year highs. Growth has slowed enough, in fact, that Federal Reserve Governor Adriana Kugler said last week that interest rate cuts are possible this year, which would help keep the economy growing.

Still, the rally has many puzzled, because it makes the market look so expensive: The S&P 500 is trading at just over 21 times forward 12-month earnings, the highest it’s been since early 2022, just before the Fed started raising rates. But as this figure shows, it would take more than just insane multiples to send the market down.

There are many catalysts to choose from. The biggest concern is that the Fed will not cut rates because inflation may remain elevated. Prices for services such as energy and utilities rose about 5% year-over-year in May. Home prices, which take a long time to change because rents reflect contracts made months or years ago, also rose more than 5%. Home prices make up more than a third of the consumer price index, and if they remain elevated for a while, inflation this year will not come close to the Fed’s 2% target.

Markets have never lost faith that rate cuts would come, even if delayed, and any weakening of that faith would be problematic.

“The most significant downside risk for the U.S. stock market is investors losing confidence in the ‘Fed put,'” wrote Chris Senyek, a strategist at Wolfe Research, referring to the central bank’s willingness to cut interest rates if the economy or stock market looks set to get into distress.

The US’s growing debt could also eventually hurt the stock market. According to the Senate Budget Committee, public debt is just over $26.2 trillion, roughly the size of the US gross domestic product. It’s expected to grow to more than $50 trillion by 2034. That means the Treasury will have to continue to raise huge amounts of money to service the debt, causing interest rates to soar.

A closer concern is the possible collapse of big technology companies. The S&P 500 technology sector is up 19% this year, accounting for much of the index’s gains, and good things are expected from the sector. Projections of revenue growth for tech companies are rising as companies adopt new artificial intelligence products, but these stocks could take a hit if earnings forecasts disappoint.

“Companies that don’t perform in the tech space will get hurt,” said Jay Woods, chief global strategist at Freedom Capital Markets.

The final day of the week offered a preview of what that could look like: Nvidia is down 5% from last week’s high, and Broadcom and Apple are also down from their peaks. Other stocks have risen enough to offset those losses, but the rally is unlikely to continue without a major catalyst, and that’s not likely to come soon.

Additionally, the consumer discretionary, banking, materials, energy and utilities sectors are all down from their all-time highs and continue to fall after briefly rising to the same key levels.

Buyer beware.

Write Jacob Sonenshine jacob.sonenshine@barrons.com