There are 2 looming risks that could spark a serious correction for the stock market, Moody's chief economist says

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  • Dec 04, 2024
There are 2 looming risks that could spark a serious correction for the stock market, Moody's chief economist says

Investors hoping for another stellar year for the stock market should stay cautious with risks on the horizon in 2025.

US stocks could see a significant correction, thanks to high asset prices and two big risks facing the market in the coming year, according to Mark Zandi, the chief economist of Moody's Analytics.

"Asset prices are getting ahead of themselves," Zandi said, speaking to The David Lin Report on Monday. He pointed to measures of lofty valuations, such as historically high stock, crypto, housing, and gold prices.

"But I think there is a growing risk — a threat — that these lofty valuations and prices will unravel in a correction and a sustained decline in price, and I do worry about that as kind of a risk scenario," he said.

"With each passing day that stock prices continue to rise strongly, or corporate credit spreads in the bond market narrow, the more worried I get about that possibility — the greater the risk that we suffer a correction that will have significant macroeconomic implications."

That risk is amplified by uncertainty surrounding Trump's policies, Zandi said, pointing to two policies in particular that could pose a serious risk to stocks.

Tariffs

Trump has proposed steep tariffs on US imports from China, Mexico, Canada, and BRICS nations. Economists have said tariffs could lead to higher prices as businesses pass the cost of the duty on to consumers, potentially raising inflation and causing interest rates to trend higher.

Trump has pushed back against the idea that his policies are inflationary. He levied tariffs during his first term as president without significant price increases, but economists say his tariff plan this time around is far more wide-reaching, explaining the difference in inflation forecasts.

"I'm no fan of broad-based tariffs," Zandi said. "If it's on the margin, no big deal. But if it's truly broad-based, that's a big deal."

"Trump will once again cut taxes and unleash American energy to lower prices on groceries and other goods when we send him back to the White House," Taylor Rogers, a Republican National Committee spokesperson, told BI in a statement prior to the election.

Mass deportations

Trump has also promised to deport millions of immigrants from the US, which, if enforced to the fullest extent, could remove nearly 12 million migrants living in the US, according to the Center for Migration Studies.

It's unclear how mass deportations will play out. If the US were to deport a significant number of immigrants, economists have speculated that deportations could hit job sectors with a high proportion of immigrant workers , like construction and agriculture.

"If it's 50,000 immigrants, undocumented immigrants that are deported, maybe that's not great, but that's not a big deal. If it's 500,000, that's a deal. That's a big deal. That could create all kinds of dislocation," Zandi said.

Fewer workers in some industries could also pressure employers to raise wages to attract talent, which has the potential to fuel inflation.

"The US relies, like Canada, very heavily on immigrant labor . If you're asking people to leave the country — and others are self-deporting, because of the pressures they're under and employers are under … that means labor markets are going to get red-hot again, wage growth is going to accelerate, inflationary pressures are going to develop, and the Fed can't cut interest rates," he added.

While risks of a stock drawdown are growing, Zandi said he largely expected markets to trade "sideways," and for stocks in particular to remain "flattish" for the next three to five years. Corporate earnings growth, meanwhile, could clock in somewhere between 4%-6% next year, he predicted.

Wall Street is generally expecting a positive, but more muted year for stock returns in 2025, with Goldman Sachs and Bank of America predicting a 10% gain for stocks next year.

Read the original article on Business Insider