Why Would Anyone Say a Market Correction is Coming?

The economy is rolling along, with job growth and wage gains, while corporate earnings seem okay. Economists and stock market forecasters are bullish for the longer term. However, there are worries about the next 6 months and in particular, the next 3 months.

3 experts below share their thoughts on the 2024 situation.

Because it appears there are no upward catalysts and it’s mostly bad news that includes stagflation, high rates, high energy costs, massive US debt financing, and China sending a glut of goods into the international markets. These stock market crash indicators should be well understood by retail investors who are investing by hope.

Sure there is demographic demand (GenZ, Millennials) and $6 trillion in cash sitting on the sidelines. But investors are smart and keeping their money out of the S&P, Dow and NASDAQ so far. The fact it hasn’t be move to equities yet really tells you how hedge funds and bankers feel about stocks.

It’s only a select number of high flyer stocks that have been bought up (e.g., Nvidia).  The economic and market views are skewed, and sufficient attention isn’t being paid to the threats.

Tom Lee May Have Gotten Carried Away Too

For instance, Tom Lee, who predicted the S&P would reach 4750 at year end 2024, just forecasted it would jump 4% by end of June. Well, we’re at end of June and it didn’t happen. Most forecasters are too flighty now and blind to the short term likelihood of a correction (decline of 10% to 20%).

Stock Market Performance Last 5 Years.
Stock Market Performance Last 5 Years. Screenshot courtesy of Google Finance.

A Stormy Summer or Fall?

The financial and housing markets can have their own summer heat domes where consumer spending pushes home prices and stock valuation well beyond sanity. And as it happens, that’s where we are now.

Of course, economists say we’re okay and a housing market crash or stock market crash likely aren’t in the cards. The soft landing is still the word on the situations. Yet, the next inflation report might show it could be a persistent problem for years. And if the economy did improve, it would only worsen the interest rate threat.

At some point, the persistence of high rates will sink in. The housing market is the most vulnerable. How long can homeowners hang on, and when will the first bank fail, especially with the weak commercial real estate sector? Add on credit card debt, and some banks such as BMO, Citizens Financial Group, and HSBC look to be the most vulnerable.

The real danger of extended high interest rates reminds me of a used car buyer who is mulling over a purchase of a “previously enjoyed” model of his liking. The risk of it is that he’s getting longer to view the condition of the vehicle and the risk of buying it. The rust, creaks, squeals, dents, wonky startups and exhaust smell seem to eat away at his confidence about it’s real condition. Wisely he considers other options.

What Happens When Fed Stimulus Fades?

Part of our self-deception regarding the US economy is the belief of many American’s that Joe Biden’s continuous trillion dollar stimulus is not causing the continuous inflation, and that magically, the central interest rate will fall soon. And soon, voters may doubt that President Trump can fix this mess of high taxes, high interest, massive debt, regulations, political fighting, and xChina adjustment in trade.

What if he should become a lame duck President and is unable to rev the economy to grow tax revenue or lower interest rates? What if the bombastic Republican leader turns off his own voters again and loses the November election? We’d be stuck with a very frail US President and a fall back of someone who speaks in word salads and has no leadership experience?

Yes, there is a lot of money in money markets to transfer over to home purchases and stocks. It’s moving over as we speak, but will stocks be worth purchasing?

Mike Wilson’s Warning

Mike Wilson, Morgan Stanley’s Chief US Equity Strategist said in a Bloomberg TV interview that a weakening job market could trigger a 10% stock correction and crush the “soft landing” scenario. He adds that there is a growth scare. And stock P/E ratios are very high.

Even without his warning, there are so many perils that could befall the country. But as the situation becomes stressed by falling consumer sales, rising rents and home prices, and job losses, the crack will start widening.

Sam Stovall’s Warning

Sam Stovall, chief investment strategist of CFRA Research believes we might be on the precipice of a major correction. He points out that tech stocks are trading at a 68% premium are at risk. We’ve seen layoffs from all the big tech multinationals and a cancellation of office space in California.

Liz Sonders Alert

Liz Sonder’s Charles Schwab’s chief investment strategist sees similarities to the last big correction in 2021.

“Looking ahead, we think a risk worth monitoring is the persistence of the aforementioned divergence between performance at the individual member and index levels. If we continue to see more weakness in the former and strength in the latter, it will start to eerily mimic 2021’s dynamic.”

Rates Could Stay High into 2026

The key to any crash forecast for housing or stocks is a continuous high interest rate, and some are suggesting rates could stay high to the end of 2026. If Trump turns the economy around, inflation will certainly happen, even if oil and energy prices fall. And there is no way consumers, mortgage holders, or speculative AI investors can hang on that long.

And Joe Biden’s full stimulus spend keeps pumping money into the system like a wasp’s stinger. All that money and a recovering economy means continuous inflation, and if jobs and wages are okay, then there can’t be any relief in rates.

As mortgage holders quake in fear of their mortgage refinancing in 2025/2026, they may not have the result they hope for. It could mean a massive number will have to sell their homes creating a strong downdraft on home prices. Sellers are holding out stubbornly now to get their lofty price, so their resolve will also break.

What’s Floating the Positive Outlook?

The rosiness of the stock market mostly stands on consumer spending and business capital expenditures according to U.S. Bank. With high rates keeping the pressure cooker on the burner, the equities markets and housing markets can’t sustain their prices.

The stock market forecast from most market experts is for strong growth for 2024. The 2025/2026 outlook is positive but it’s all built on a Trump Presidency, deregulation, lower energy prices, and much lower interest rates.

Time will enlighten us all of course, and here’s hoping we’ll avoid a correction this year.

More on the forecast blog: Stock Market Forecast | 3 Month Forecast | 6 Month Forecast | 5 Year Forecast | Housing Market Predictions | Real Estate Forecast 2025 | 2025 Stock Market Forecast | S&P Forecast | Google Finance