The stock market continues to reach new heights, but some experts warn that a surprise economic slowdown could disrupt the bull run. Michael Hartnett, Bank of America’s chief investment strategist, sees warning signs despite strong market sentiment and record inflows into risk assets. Hartnett notes that the trading range for U.S. stocks is likely to end due to either lower inflation or weaker growth.
While inflation may not be an immediate concern, he believes the bigger risk is an unexpected slowdown in growth. This could be caused by a decline in housing, the fading effects of wealth and job growth, and inflation impacting consumer confidence. Another factor that could disrupt the market is President Donald Trump’s efforts to reduce the size of government.
Since taking office, unemployment claims in Washington, D.C., have increased significantly. Government spending, which has coincided with the market run, is also at risk. In 2024, government outlays were 52% higher than in 2019, and the deficit as a share of GDP is at 6.3%, a level rarely seen during economic expansions.
Despite these risks, investors continue to allocate funds to equities. Last week, $16.8 billion flowed into stocks, the highest among all asset classes, raising the allocation to stocks to the highest level since March 2022. Bonds and cash also saw inflows of $16.2 billion and $3.3 billion, respectively.
However, Hartnett points out that the slowdown is starting to be flagged by the outperformance of bond-sensitive and defensive stocks. For example, staples have been the best-performing sector over the past month, gaining 8%. As the market reaches new highs, investors are grappling with a mix of excitement and anxiety.
Market excitement tempered by growth concerns
While the momentum of the Trump bump and growing corporate earnings continue to drive the market, underlying issues are causing concern about market stability. Inflation remains a key factor influencing both consumer sentiment and recent market moves.
President Trump’s latest round of tariffs, which include 25% levies on pharmaceuticals and semiconductors, aim to encourage foreign companies to invest and operate in the U.S. However, even the threat of tariffs can have an impact, as seen in the lumber futures market. Despite these concerns, the S&P 500 continues to soar, possibly due to the extended timeline or growing insensitivity to Trump’s threats. Vanguard’s Andy Reed notes that investors now see a higher chance of an economic disaster than a market crash, a divergence from the typical lockstep movement of these concerns.
As the White House’s economic advisers work to boost economic growth and productivity while cutting government spending, the lag in economic data provides a buffer for the president. However, if Trump’s legislative agenda proves to be inflationary, the central bank’s next cut may become increasingly unlikely, potentially leading to fleeting gains from the early days of his presidency. Investing when stocks are trading at all-time highs can be challenging, but history suggests that new highs tend to cluster together.
About 13 months after hitting a new all-time high, the S&P 500 Index closed at a new all-time high 58 times. The median bull market lasts 46 months, indicating that the current bull market may have about a year and a half until it reaches its midpoint. Investors looking to put their money in stocks at these levels should be aware of potential risks and upside.
The S&P 500 currently trades with a price-to-earnings ratio of about 22.2, above its long-term average valuation. One option is to invest in a simple S&P 500 index fund, while another is to consider an equal-weight S&P 500 index fund to decrease concentration in high-value stocks. Ultimately, remaining on the sidelines for too long rarely works out in an investor’s favor.
Being prudent with investment choices should position investors well, even if the market enters a downturn.
