Estimates Say Stock Market Will Go Higher, But Risks Shouldn’t Be Ignored
At the end of the day, the stock market is a function of how business earnings look. If earnings expectations are rosy, the stock market will rally. If investors are pessimistic about the future, a stock market crash will follow.
As it stands, the financial performances of companies traded on the stock market have been great, and analysts and strategists say the outlook is shiny.
Advertisement
Here’s some perspective…
In the first quarter of 2024, with 98% of the S&P 500 companies having reported their financial results, the earnings growth rate sat at 5.9%. That was the highest year-over-year earnings growth reported by S&P 500 companies since the first quarter of 2022. (Source: “Earnings Insights,” FactSet Research Systems Inc., May 31, 2024.)
That earnings growth rate was well above what analysts were projecting at the end of the first quarter: 3.4%.
What’s ahead?
In April and May, Wall Street analysts got more optimistic, forecasting a second-quarter earnings growth rate for S&P 500 companies of 9.2%. They also forecast a third-quarter earnings growth rate of 8.3% and a fourth-quarter earnings growth rate of 17.5%!
For the entire year of 2024, analysts project that S&P 500 companies will report earnings growth of 11.3%. For 2025, they expect earnings growth of 14.2%.
All in all, looking at those earnings estimates, the stock market could continue to trend higher.
Great, right? There are, however, several risks that could affect the direction of the stock market.
These 5 Stock Market Risks Shouldn’t Be Overlooked
As a stock investor, it’s important to keep risks in mind. When you know the risks, you can act accordingly. Here are five risks that I think are worth watching closely.
1. Interest Rates
At the beginning of 2024, it was widely expected that the Federal Reserve would be cutting its benchmark interest rates six times this year. Now, it’s expected that the Fed will only cut interest rates maybe two times in 2024. Some even say there might not be any rate cuts this year. Volatility in interest rates has direct consequences for companies that have high debt; it could hurt their profitability.
2. U.S. Economy
Some leading indicators are suggesting that the U.S. economy might not be as strong as it was a few quarters ago. A weak economy generally translates into slower earnings growth. If things get worse, it could translate into earnings declines. This would lead to a rigorous sell-off on the stock market.
3. Global Economy
Problems in the global economy persist. Major economic hubs are struggling to grow. Since companies that are traded on the stock market earn revenues inside and outside the U.S., a slowing global economy could mean lower revenues and, ultimately, lower profits.
4. Possibility of a Liquidity Event
In early 2023, the financial system handled the failure of a few regional banks well. However, with interest rates high and expected to remain high for years to come, could there be some sort of event with more bank failures? I think it’s possible, and events like bank failures dry out the liquidity of financial markets. In order to raise cash, investors usually sell off stocks.
5. Profit-Taking
Nothing even has to go wrong, but if investors as a whole decide to take profits (since share-price gains have only gotten bigger over the past few quarters), it could change the direction of the stock market.
