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The US stock market is falling. But there are risks that threaten to put an end to the euphoria.
The three “major” risks are Federal Reserve policy, an unexpected recession and lower-than-expected corporate earnings results, David Rosenberg, founder and president of economic consulting firm Rosenberg Research & Associates, said Wednesday. CNBC Financial Advisors Summit.
S&P 500 Index and high tech Nasdaq closed at a record high on Tuesday. As of 3:00 pm ET on Wednesday, U.S. stocks are up about 11% each for 2024.
Big threats to the stock market
Nvidiamaker of artificial intelligence chips, played a big role in the rise of the stock market, market analysts said at the FA summit.
The company, “the poster child for generative artificial intelligence as a whole,” was “solely responsible for the last leg of this bull market,” Rosenberg said. In 2024 alone, it was up 90% as of 3:00 pm ET on Wednesday.
Nvidia is certainly a poster child for positive stock market sentiment, Brandon Yarkin, chief operating officer of Universa Investments, said at the FA Summit.
Nvidia reports quarterly earnings results after the market closes on Wednesday.
According to Rosenberg, disappointing results could lead to a decline in the stock market. It would be similar to what happened with the dot-com craze in 2000, when Cisco’s missed results ended the tech mania, he added.
In addition, Fed policymakers raised interest rates to their highest levels in two decades to curb high inflation. It’s unclear when the Fed might start lowering borrowing costs; many market forecasters expect them to do so at least once by the end of the year.
High interest rates have increased the returns investors can earn in cash and money market funds, where they can earn, for example, a 5% yield, Rosenberg said. Keeping rates higher over the long term gives cash and money market funds an edge over stocks from a risk-reward perspective, he said.
In addition, the US economy remains strong amid high borrowing costs and a gradual decline in inflation. This has led many forecasters to predict that the economy is on track for a “soft landing.”
If there is a recession that no one sees coming, it will be a “big surprise” that threatens the stock market, Rosenberg said.
Surprise and uncertainty—both economic and geopolitical—are the two things investors hate most, Carla Harris, senior client advisor at Morgan Stanley, said at the FA Summit.
Still, long-term investors should resist the temptation to jump ship if the market falters, experts say.
The richest and most successful investors “stay in the markets longer,” said Raj Dhanda, partner and global head of wealth management at Ares Management Corporation.