US stocks are poised for a challenging year as market vulnerabilities come to the forefront, warns the CEO of deVere Group, one of the world’s largest independent financial advisory and asset management organizations.
Nigel Green believes that while the rally of the past two years has been remarkable, ranking in the 93rd percentile over the past century, this extraordinary surge has left equity markets “increasingly susceptible to corrections.”
The resilience of equity markets will largely depend on earnings growth, but the warning signs for short-term turbulence cannot be ignored.
“The complacency among investors regarding inflation and interest rates is alarming,” says deVere’s CEO, who forecasts that “US interest rates could rise above 5%, a level not sufficiently priced into the market.”
He continunes: “The market’s current assumptions about inflation and rates are dangerously optimistic.
“With inflationary pressures persisting, driven by supply-side constraints and wage growth, the risk of further rate hikes looms large. As a result, bond yields can be expected to climb higher, with 10-year Treasury yields likely to breach the 5% threshold.”
The implications of these trends are significant. Rising bond yields create competition for equities, putting pressure on stock valuations, particularly in sectors that have benefited from low-rate environments.
Higher yields also signal potential cracks in economic growth as borrowing costs rise, impacting corporate profitability and consumer spending.
“Investors must prepare for this dual threat of higher rates and slower growth,” notes Nigel Green.
“The robust earnings growth seen over the past two years has been a key driver of market performance. However, the sustainability of this trend is now in question. As central banks maintain their hawkish stance to combat inflation, the risk of an economic slowdown increases.
“Disappointments in economic data or earnings could act as a catalyst for market corrections.”
He says that Investors must adopt a more cautious approach and be ready for increased volatility. He goes to emphasize that “while the long-term outlook for equities remains positive, driven by technological innovation and structural shifts in the global economy, the path forward will not be without turbulence. The market needs to digest the extraordinary gains of recent years, and this digestion period could manifest as a correction.”
“The extraordinary performance of the past two years has set a high bar, but it has also created vulnerabilities,” he says “We are entering a phase where careful risk management and diversification will be paramount.”
The deVere CEO concludes “Investors must be proactive in adjusting their strategies to account for the evolving macroeconomic landscape. Waiting for the storm to hit could prove costly.
“While the equity markets are expected to make progress over the year, driven by earnings growth, the journey will be fraught with risks. Rising bond yields and potential disappointments in economic data or earnings are key threats that could derail the rally.
“Prepare for volatility, manage risk diligently, and stay focused on the long-term opportunities.”
