Will the Stock Market Crash?

You and many other investors are concerned about how the US will manage this transition to American prosperity and the deficit-free government. Just this past week we saw a minor corrrection as the FED speech noted persistent inflation and an unwillingness to drop rates further in 2025.

That was a depressing outlook and a promise to keep thwarting small businesses in their attempt to struggle free of government-based suppression. If you look take a look at the S&P 500 forecasts, they’re positive with up t0 10% growth (see Tom Lee market forecast). The Mag7 have been muted as analysts said a rotation to small caps would happen, but it still hasn’t. In fact, in a tight monetary policy environment with inflation, why would small business have it so good? With rates high, the Mag7 stand to perform better, particularly with AI-based productivity gains.

There is so much momentum with a strong pro-US theme going so if the markets were to slide, it would have to be something dramatic to stop it. And out of control, unaffordable government spending reigned in and terminated, that most obvious threat is being neutralized. The Republicans feel that it’s all under control, but what if they can’t get trade deficits fixed, and spending under control? And what if they intend to spend just as much to bolster US economic domination, and to use it to ensure complete strength for their government?

So many political questions that are difficult to answer.

We’ll get into the top 5 most likely initiators of a stock market crash below.

Ed Yardeni spoke of the risk in a Fox Business interview recently. He drew a corollary to the roaring twenties of the 20th century which ended very badly. The stock market has soared to peaks and the forecasts for extreme continued growth are a little sketchy. Ed notes the danger of this “melt up” as it’s being referred to, however he doesn’t see any signs of recession. Yet he believes there is room for more growth.  And just this week, he still concedes that no one knows for sure.

As I’ve repeated much for the last decade, politics runs markets and business health. And will President Trump having complete control and instituting a huge group of top, enabled business people to government posts, many of them billionaires, it’s hard to see how they’ll let anything stop this US ascendency to prosperity again. Make America Great Again is coming true.

On January 20th, American businesses and investors will enjoy much lower taxes, harmful regulations will be deleted, energy costs will likely fall, and more trading partners will be required to play fair and buy American products. The balance of trade is on President Trumps mind, which bodes really well for the US which has been running damaging, depressing $1 trillion dollar trade deficits.

Why Might a US Stock Market Crash be Imminent?

The danger has to be in the transition to the Pro-American agenda and attempts to sabotage it.  The FED intends to stand in the way of the rapid progress that President Trump wants. It doesn’t share the rosy image of increased energy, lower taxes, rising wages, and easy credit for home buyers and consumers. It is more likely interested in keeping rates high to support the bond and treasury market.

The job of the FED is to suppress strong job growth and prosperity and consumer prices. And meteoric growth can lead to trouble. If the FED feels growth is too fast, and Trump can’t build supply in the economy fast enough, they could be justified in raising rates again. Rising rates would deliverable a nasty blow to investor confidence.

For the sake of discussion, and to evaporate any fear of a true stock market crash, let’s look at the top 5 biggest threats to the markets:

1. Geopolitical Tensions and Protectionism

Impact on Stock Prices:

• Trade Barriers and Tariffs:
  • Increase costs for multinational corporations reliant on global supply chains.
  • Squeeze profit margins as businesses struggle to absorb or pass on higher costs.
  • Lead to retaliatory measures by trading partners, reducing market access and revenue opportunities.
  • Sectoral Impact: Export-heavy industries like manufacturing, tech, and agriculture face declines; global equities in emerging markets (dependent on U.S. or EU trade) also slump.
• Investor Sentiment:
  • Heightened uncertainty discourages investment, pushing stock prices down.
  • Safe-haven assets like gold or bonds attract capital, reducing liquidity for equities.

2. Rising Interest Rates

Impact on Stock Prices:

• Increased Borrowing Costs:
  • Higher interest rates make it more expensive for companies to finance operations, expansions, or debt refinancing, reducing earnings.
  • Leveraged companies, particularly in industries like real estate, utilities, or telecoms, face sharp declines.
• Shift in Asset Allocation:
  • Bonds become more attractive as yields rise, diverting capital away from riskier equities.
• Impact on Valuations:
  • Discounted cash flow models use interest rates as a key input. Rising rates reduce the present value of future earnings, leading to lower valuations, particularly in growth sectors like technology.
• Economic Deceleration:
  • Consumer spending and corporate investment decline, hurting sectors reliant on discretionary spending (e.g., retail, automotive).

3. Debt Overhang

Impact on Stock Prices:

• Corporate Debt:
  • Highly leveraged firms may face solvency issues in a high-interest-rate or low-revenue environment.
  • Default risks can create fear contagion across equity markets, especially if concentrated in key sectors like tech or energy.
• Government Debt:
  • If U.S. debt levels cause fears of fiscal irresponsibility, Treasury yields might spike, increasing the cost of borrowing for corporations and consumers.
  • Rising concerns about future tax hikes to manage debt could dampen business confidence and investments.
• Financial Sector Exposure:
  • Banks and financial institutions holding risky debt may see their stock prices tumble, triggering sector-wide selloffs.

4. Economic Disparities and Consumer Spending

Impact on Stock Prices:

• Weakened Consumer Spending:
  • A dip in consumer confidence or rising unemployment directly reduces revenues for consumer-centric companies (retail, hospitality, travel, etc.).
  • Discretionary sectors, including luxury goods and high-margin products, experience the sharpest declines.
• Credit Markets:
  • As consumer credit tightens (due to rising interest rates or defaults), spending on big-ticket items like homes, cars, and electronics declines. Rising rates or higher for longer puts intense pressure on the real estate market.
  • Real estate and automotive sectors see stock declines, spilling over into materials and industrials.
• Market Breadth:
  • Reduced consumer spending erodes the broad economic base that supports long-term growth, hurting small and mid-cap stocks more acutely.

5. Asset Bubbles (Stock Market Overvaluation)

Impact on Stock Prices:

• Valuation Adjustments:
  • Overvalued markets are more prone to corrections as even minor disappointments in earnings or macroeconomic data can trigger selloffs.
  • Sectors with inflated price-to-earnings (P/E) ratios, like tech or biotech, experience sharper declines as investors rotate into undervalued or defensive stocks.
• Momentum Reversals:
  • Momentum-driven trades unwind rapidly, causing sharp, cascading price declines, especially for high-growth or speculative stocks.
• Liquidity Concerns:
  • Overvaluation often coincides with high leverage and low liquidity. In a downturn, margin calls force investors to sell, exacerbating the selloff.

Are There Any Substantial Threats Though?

Notable threats would be wars, trade wars, and government debt/revenue issues. President Trump is ready to cut government funding severely to eliminate waster. With Elon Musk’s DOGE in operation, the fears are excessive cuts in government jobs and reduced tax revenues could leave the US government in peril.  However, a sizeable reduction in government jobs could help reduce inflation. First of all, inflation was largely attributed to over-spending by the government so eliminating it should help considerably.

Yet, any time drastic, sudden changes in the market happen, it can send ripples through the equities market, causing nervous investors to panic.

Consumer panic is generally not considered a crash factor, yet with Americans in a greedy mood expectant of great prosperity, pullbacks and profit taking might get pushed into overdrive, especially if the Democrate media see it as an opportunity to crash Trump.

Change is a variable (market rotation, fed rate pivot, disinverted curve, ai technology, election) that brings doubts and instability.

Investors are positive but still holding their breath. Warren Buffet is very cash heavy himself, suggesting he’s waiting for something, likely the election decision.  And it looks like a Trump win would be the sigh of relief that would allow US investment to go full throttle. And that would bring inflation back.  Is the Presidency and FED rate the factors everyone believes they are? Can Harris, a former attorney manage the world’s largest capitalist economy, mired in massive debt?

Investor Confidence Soaring

Investors’ confidence is one indicator to consider. Consumers are expecting a long period of prosperity ahead with booming times for small business, the travel market and the housing market, and are only getting comfortable with the idea. And as the chart shows, their mood is positive but not nearly as strong as it was before the Covid pandemic. There’s room for prolonged growth similar to the 2012 to 2019 period.

The of Economic Repression in the US?

The chart below shows the persistent low GDP performance of the US. When compared to China’s it seems anemic. With the new Trump features, the economy has to produce much larger GDP. Trump’s requirement for foreign countries including Europe to buy American to achieve balance, that alone is a massive boost in GDP.

President Trump seems determined and serious to bring trade back to fair territory and by wiping out a $1,000,000,000 yearly deficit, it’s a massive infusion of lost wealth that’s being captured and spent in the US.

When is Critical Mass?

The key insight here is that the markets haven’t hit a critical mass point that sparks a collapse.  The critical mass event would be a roaring US economy where euphoric buying occurs and where inflation begins to soar.

And the matter of excessive American prosperity, spending, and lack of caution could easily result in another 1920’s style crash.

Are there any corollaries between now and 1929? With certain political outcomes, the stage might be set for a roaring twenties scenario, something Ed Yardeni has spoken of.

We need to ask why, if consumer spending drives the economy, why it would continue this fall season?  Why is consumer spending so hot?  And what happens when it fizzles? Government and citizen debtloads are very high.   Based on polling data, Americans might vote for the status quo, but the status quo stands on a mountain of debt, China trade, and persistent high interest rates which may not be reduced. They could vote to protect their social entitlements.

 

The point to make today is that a negative US economic forecast would expose the weakness of the entire investment marketplace.

A crash in the US stock market would likely require:

• negative GDP, earnings, and global economic reports
• fast consumer spending drop, unemployment rise
• housing market downturn — price collapse
• a trade war with China (anti-dumping action already happening)
• persistent high interest rates which allow the Democrat government to attract buyers for its bonds/treasuries, and cover a tax shortfall to keep the government functional
• debt ceiling impasse and Republican resistance
• government spending cuts because the money is running out
• tax threats against the wealthy
• rising oil prices
• a Democrat candidate winning the Presidential election

Right now, it doesn’t look like the negatives are gaining any traction. The biggest threat might actually be high oil prices, yet productive capacity is high and it would take a couple of years before demand outstrips supply. Of course, OPEC could squeeze supply and push prices up at any time.  They likely will not support <$60 per barrel so we’re near the best we can get.  In fact, right now at $70 a barrel and below $3 for gasoline, it looks positive and stable.

See all the factors to watch for.

In this article:

It’s all Political
What Supports the Economy Currently in 2024?
Investor Bets are on Trump Win
Steady High Interest Rates Induce Recessions
Stock Market Crash Timeline
US Government Debt Ceiling Woes
Why the Optimism from US Investors?
The Economy is Okay, so How Could this Bubble Burst?
Is Euphoric Thinking the Status Quo Now?
Will the Housing Market Collapse Too?
The Blind following the Blind
Key Market Crash Factors to Watch

It’s All Political

It’s not market valuations that matter. It’s political decisions out of the White House that raise the risks.  And those risks are accumulating like a pressure cooker.

Is the FED rate a political decision?  Yes, because J Powell and company respond to White House actions.  They’re keeping the rate up due to inflation from overspending (which Powell has complained about).  And the rate might stay high because the Democrat government needs to attract buyers of government bonds and treasuries to stay afloat. They can’t sell their bonds at 2% or 3%, as they’re junk bonds compared to top, improving returns on equities.

They can eliminate the taxes for those buying bonds and treasuries which might help for a short-term boost, but inevitably, junk bonds at 2% returns simply aren’t investible. With tax revenues flat and at risk, they’re barely able to pay for the interest on the national debt. That leaves little for running the country, hence the need to borrow and print trillions.  The pressure cooker gets hotter.

The question is, when does the house of cards fail?  The reason we haven’t seen the collapse is entirely due to stimulus spending. And when will that tap be turned off?

Donald Trump losing the election would be the major catalyst for a market collapse. The stock market, including small cap investors have already factored in a Trump win (the Trump trade). A Trump/Republican win would bring lower interest rates, lower taxes and deregulation — all very good support for American business, and even the International Megacaps would do alright too. Small business would boom. Conversely, a Democrat win would destroy the expectations for 2025 and for the next 5 years.

What Supports the Economy Currently in 2024?

The economy itself is protected by continued stimulus money pouring in and bolstered by consumer spending and strong employment. There remains a sizable pot of money in money markets that can fund a big recovery.  But it hasn’t transferred over to equities as yet. Institutional and retail investors are wary.

Yet, as each month passes, the interest on the national debt and low tax revenues are putting the squeeze on the free-spending Democrats.  At some point, the deficit spending has to stop and with a Republican win in the Senate and House elections, they would be able to block government over spending. This is almost a certainty if Trump loses the election.

A check of each US state also raises concerns about a collapse. California and New York remain in severe distress often supported by FED handouts. A recession would be devastating to many vulnerable US states.

Investor Bets are on a Trump Win

The market expects and anticipates a Trump win. And that is far from a certainty now. Investors will remain cautious until Nov 8th where they can make their investment decision for 2025 and the next 5 years.

Predicting the next stock market crash is never easy. So many economic, political, and international trade factors and more, are difficult to predict.

We might think any mention of a stock market crash is pessimistic.  Yet awareness of the factors that precede a crash is important for pensioners, over-leveraged investors, frightened fund managers, options traders, and others who might not be able to deal with a market failure.

With interest rates rising, housing sales cooling, China production shutdowns, Fed balance sheet tightening, consumer sentiment dropping, price-earnings ratios too high, wages and jobs too positive, and the dollar racing upward in value, there are plenty of reasons to consider the possibility of a major slide.

Steady High Interest Rates Often Induce Recessions

Rising interest rates always preceded a recession and most housing market crashes. Most forecasts for 2025 and 2026 are subdued, as economists might see high rates, debt, trade protectionism, and more retarding economic output and employment. But are they just being political?

Andrew Slimmon of Morgan Stanley believes a 10% to 15% correction is coming this year.  He says to be ready for this drop, ready to buy high beta, low risk value stocks. Goldman Sachs has predicted a 35% chance of a recession.

Even Jeremy Grantham is being interviewed now, and he’s been calling for a crash for many, many years. The boy who cried wolf is still howling.

With further Fed stimulus uncertain, the US economy is coasting on fumes and might struggle to reach the recovery without major correction. The Dow, S&P and NASDAQ are well down again today after a bad week. There is real concern as for a recession. No one really considered war and trade embargoes to enter the stock market forecast picture.

Stock Market Crash Timeline

If you’re looking for stock market historical timeline events, history charts won’t help.  The 1929, 1987, 2000, 2007 crashes were unique, with unique factors that combined in a fateful sequence. The economy’s strength is cited as invulnerable. However, as pointed out in this post, the real catalysts are being hidden, covered up and spent over to get them out of sight.

US Government — Debt Ceiling Woes

As you read the full investigation of a stock market plunge potential threat to you and your investments, consider that the one thing that may break the economy at some point – US government debt. My first post on the debt was when it was $20 Trillion. Now it’s fast approaching twice that level.  While we can ignore our debts, inevitably, we reach the allowable limit. In this case, the interest payments are nearing $1 Trillion, which is more than the US military budget.  There are estimates of near $2 Trillion in 2025.

Each debt ceiling limit hit has been responded via continuous ceiling hikes requiring legislation and bipartisan support. When the debt ceiling talks resume

The New York Times does cover these grave dangers, and actually devotes a whole section to the US national debt.

What Leads to a Stock Market Crash?

• P/E ratios are double the S&P historic average
• lower stimulus spending as small business still hasn’t relaunched
• interest rate rises too fast causing shockwaves
• extreme volatility shakes conservative investors’ confidence
• supply chain stoppages kill trade and jobs
• markets hit their peak and money leaves the US markets for better returns elsewhere
• big tax hikes on corporations and billionaires hits harder than anyone realizes
• big state taxes in California, Illinois, California and several other states will see wealthy people leave
• wealth Americans avoid US taxes any way they can – invest in Mexico, China, Indonesia, Vietnam, Brazil
• trade deficit pushes toward $1 trillion pushing government into revenue crisis
• unemployment moves back up given China is too competitive and controlling of markets
• democrats kill fracking which would create job losses and it raises oil and fuel prices
• the Fed is forced to push interest rates up to support government bonds and treasury sales
• rising interest rates reduce profit and increase bankruptcies and foreclosures
• pension funds fail as stimulus for them ends this year

The Dow Jones forecast, S&P forecast, and NASDAQ forecasts are positive for the last 3 months (see chart below) but the recent selloffs are a concern.

13 Reasons Why the Optimism from US Investors?

1. economic data is positive with spending, GDP, manufacturing output, and lower inventories
2. inflation is dropping and has been for 15 months
3. possibility of a Trump win with lower taxes, lower social costs, lower crime, deregulation, lower interest rates, reduced war threat, and pro US-business initiatives
4. Europe is spending stimulus funds
5. China is stimulating their economy after seeing exports to the US decline
6. increased tariffs against China protects US businesses
7. US domination of AI technology protected from China predation
8. small businesses see lower inflation and borrowing costs
9. investment in treasury bonds (rising yields) shows a taste for risk
10. travel market remains strong
11. consumer confidence still strong reflecting optimism
12. real estate market at rock bottom with price declines and lower mortgage rates inevitable to stimulate sales beginning in 2025
13. stock market investors are optimistic

Since we can’t rely on experts to predict up against today’s unique circumstances, risks, and changing trade relations, we should try to understand it ourselves and create our own 1 to 5 year forecasts.

The Economy is Okay: How Could this Bubble Burst?

It’s all about investor and consumer confidence. And with stocks bubbled up, there’s bound to be significant fears of massive losses. Given so many Americans live on the edge financially, they would pull back spending and selloff fast. We’ve seen several of the selloff events which shows everyone has their finger on the trigger.

It’s going to be a political event that will start the fast selloff. It’s hard to anticipate what that will be. A Kamala Harris win on Nov 5th, 14 days from now would do it. Investors may feel the bubbled up prices are simply not worth it.  With a lack of confidence in the Democrat run economy, investors could flee the stock market. That in turn could affect consumer spending, and lead to years of low performance.

But is a 10% correction really a stock market crash? The real harm might not be the drop but rather

Is Euphoric Thinking just the Status Quo Now?

This market’s phenomenal, euphoria-driven rise in 2024 surprises analysts and investors who wonder why? Valuations are sky high and in some cases laughable.

Will the Housing Market Collapse Too?

Home prices keep rising to new record highs even as sales decline. Sellers are lockedin and buyers can’t afford houses, with average qualifying incomes and mortgage payments far exceeding buyer’s capabilities.

Millions of mortgage holders will have to refinance at high rates, meaning they will be house poor or forced to sell.

Experts predict a crash will not happen. But that’s based on the theory that with buyer demand at ultrahigh levels and supply so inadequate, and with new home construction falling, and lending criteria strict, that home prices cannot fall. But outside that theory is the reality that people simply cannot afford to buy or rent today.

The actual crash trigger would involve millions of homeowners who can’t afford their homes or want to dump them before prices fall. If the political/economic outlook should dim, how strong would this dumping factor become?

The Blind following the Blind

Investors often follow trends, blindly tailgating each other on a high-speed digital highway. If anything happens, there’s going to be a chain reaction crash. The surge of self-directed investors too is one factor a few markets experts have noted.

While many follow Warren Buffet and listen to AI stock forecasting technicals, they don’t really know what they’re doing. They’re in the dark about complex market forces and suddenly find themselves victims in a sentiment-driven panic.

Key Factors to look for:

• stock prices at record levels
• government passes complicated new tax bills that confuse and make investors uncertain
• geopolitical events disturb international trade relationships and flow of goods/money
• inflation and wages rise faster
• housing prices peak
• consumer product surpluses
• natural end of a long business cycle
• stock price to earnings ration too high (Shiller Pace is above 30)
• misery index rises (unemployment rate + inflation rate)
• the NAAIM index is too high (professional investors optimism)
• growing market fear that may induce panic (investment advisors, market experts, bloggers)
• assets have peaked in profit performance and wealthy begin to unload
• too much consumer debt combined with risky investments (housing) and rising unemployment
• corporate-Equities-to-GDP Ratio
• accidental or emotional timing of government fiscal events (China preventing funds exodus)
• key corporate failures in financial sector (bank, mortgage company, investment firm)

When do you think this current bull run in the markets will end? Please do comment below on how you see the 2025 stock market playing out.

Disclaimer:  The statements and information presented in this post is not intended as professional investment advice. It is solely an exploration of stock investing and the risks, perils, and behavior of stock markets and the economy. No one should rely on a single source of information or a single stock market expert or investing professional’s advice.  That is high risk. The overall message of this post might be to diversify stock, real estate, and cash/gold holdings as a hedge against stock market crashes.  Investors should look into hedging strategies but be aware that even hedging may provide limited protection from a crash.