By Daily Mail (U.S.) | Created at 2025-01-07 00:51:34 | Updated at 2025-01-08 06:01:28
1 day ago
Experts are sounding the alarm over the stock market's 'frothy' conditions - predicting a sharp downturn after 2024's extraordinary gains.
Five leading Wall Street analysts told CNN they foresee a possible bear market in 2025 - a decline of 20 percent or more - following last year's record highs.
Such a drop could have widespread repercussions, hitting millions of Americans' 401(K)s and other investments while also destabilizing the broader economy.
A bear market often occurs when stock prices outpace the actual earnings of the companies they represent.
Analysts from Moody's, UBS, JPMorgan and Investco warn that the current market is 'untethered from reality,' leaving it dangerously exposed to a sharp correction.
'I'm very concerned because the stock market is pricing in nothing but blue skies and sunshine forever,' Mark Zandi, chief economist at Moody's Analytics, told CNN.
'The market is very richly valued, bordering on frothy,' he argued.
The main US index, the S&P 500 gained 23 percent last year, driven by the artificial intelligence boom and the gains of the so-called Magnificent Seven tech stocks.
Mark Zandi, chief economist at Moody's Analytics said the market is 'bordering on frothy'
Experts have issued dire warnings of a severe stock market drop in 2025
However, there are concerns from some experts that these stocks - which include Nvidia, Apple, Meta, Microsoft, Tesla, Alphabet and Amazon - now have an oversized bearing on the index's success.
The S&P 500's total return, including dividends, was a huge 58 percent over the past two years. But without the Magnificent Seven this would have been 24 percent, according to S&P Dow Jones Indices.
Zandi told CNN he hasn't been as worried about the market since the dot-com bubble of the 1990s, and fears a drop of around 20 percent sometime this year.
The Moody's analyst warned that such a steep decline could seriously harm the US economy, as it would hurt consumer confidence and lead to a pullback in spending.
This would hit the economy hard as consumer spending is still the number one driver of growth in America.
'The run-up in stock values has played a critical role in the economy's success. It's driven a lot of spending,' he told the publication.
'The wealth effects are quite potent, but if the stock market went down, and stayed down for a lengthy period of time, that would knock the wind out of high-income spending.
'And that's a threat to the economy,' he explained.
Kristina Hooper, chief global market strategist at Invesco, said there could be a market drop
There are concerns from some Wall Street analysts that stocks are overvalued
David Kelly chief global strategist at JPMorgan Asset Management agreed, arguing there is a 'danger' that such high valuations are leaving financial markets vulnerable.
'I'm worried about asset bubbles,' Kelly told CNN.
'A lot of castles in the sky have been built on the foundations of this very stable economy.'
'You could have a big correction at some stage in the things that are not tethered to reality,' he explained.
'There are a lot of very frothy markets out there that could take a shellacking.
'Investors must think carefully about how much risk they are taking' he warned.
UBS also recently sent out a warning to its clients, arguing that many of the conditions of a market bubble are already present.
'The problem with a bubble thesis is that when a bubble bursts, investors tend to lose 80 percent of their money,' Andrew Garthwaite, UBS global equity strategist, wrote in a December report.
The S&P 500's last two-year total return including dividend came to 58 percent
David Kelly chief global strategist at JPMorgan Asset Management, said high valuations are a 'danger'
Ed Yardeni, president of investment advisory Yardeni Research, said a lot depends on the new administration
According to UBS, key bubble indicators include declining corporate profits, heavy participation by retail investors, and a significant time gap - at least 25 years - since the last major bubble.
A bubble 'happens when there is a narrative of "it's different this time around," normally associated with technology or market dominance, and we have both,' Garthwaite wrote.
Itis not all bad news. UBS believes stocks could still rally another 15 to 20 percent before the bubble is actually reached.
Other experts are worried that incoming President Donald Trump's economic agenda - which so far is slated to include tax cuts, tariff hikes, deregulation and mass deportations - could trigger a crack in confidence and therefore sell-off in the bond market.
He was referring to Government bonds, which are basically IOUs issued by the Treasury when they need to money.
Ed Yardeni, president of investment advisory Yardeni Research, told CNN that investors will be watching the new administration closely to see if they can address growing concerns about federal budget deficits and debt.
Andrew Garthwaite, UBS global equity strategist, warned: 'When a bubble bursts, investors tend to lose 80 percent of their money.'
'If they can't get their act together and only agree to tax cuts, the bond market will freak out,' he told the publication.
This in turn could spook the stock market he argued.
Yardeni thinks the market could drop by 10 to 15 percent, CNN reported.
However, he does not think it will move in to a fully blown bear market of 20 percent or more because a recession doesn't appear to be imminent.
Kristina Hooper, chief global market strategist at Invesco, also agreed that this year could see a market drop but that long-term investors should not see it as a negative.
'It's irrelevant in the grand scheme of things,' Hooper told CNN.
'We could see a pullback, but I think it would be temporary and perhaps healthy, preparing the stock market for the next leg up.'
