There’s been something strange in the air since the start of the second quarter, and much of Wall Street believes it may be hinting at a stock market crash to come. Despite the strength of equities to start the year, investors and economists alike seem concerned over a potentially brutal correction lurking underneath a seemingly tranquil surface.
At a glance, things seem relatively cheery. Despite April’s slip, the S&P 500 is up about 9.5% year-to-date, almost at its 10% average yearly return — and 2024 isn’t even half over. Corporate profits are also up 5.2% from a year earlier, the strongest growth in almost two years.
Yet, the entire texture of the market has changed in just over a month. The S&P fell 4.3% in April, one of the most historically positive months for equities, off the back of underwhelming economic data. Unfortunately, it may just be the beginning.
Underwhelming Economic Data Casts Shadows
Inflation is clearly proving more stubborn than economists estimated, continuing to eat away at the purchasing power of regular Americans. As a result, the Federal Reserve is expected to hold rates higher for longer. The CME Group now projects either one or zero rate cuts this year despite entering the year forecasting three or more rate reductions.
The labor market is also finally starting to feel the pinch of the Federal Reserve’s tightened monetary policy, as evidenced by the unexpected jump in unemployment in April and rising jobless claims.
Even gross domestic product (GDP) growth came in under expectations in Q1 and by a notable margin.
Now, there are certainly concessions to be made for all the aforementioned economic indicators. While inflation isn’t easing, it’s also not climbing much at 3% annually. While not at the Fed’s 2% target, it’s undoubtedly a far cry from its 9.1% peak in June 2022.
It’s a similar story with jobs and GDP. While unemployment and economic production have decelerated, they are still far from being of any real recessionary concern.
But, as the old adage goes, Rome wasn’t built overnight, nor did it collapse.
Will the Stock Market Crash in 2024?
The fact is, this reversal in GDP, employment, and inflation may be the beginning of wider deterioration.
While corporate earnings are strong, 70% of stocks on the S&P 500 are trading below their 2021 highs. Last month, the widely watched Fear and Greed Index hit “Fear” for the first time since 2023, and it’s remained there since.
That said, some on Wall Street believe the slide in economic prosperity may not actually matter too much for stocks. Indeed, for an earnings-dominated investor base, profit is king, even amid growing economic turmoil.
“Equities don’t need Fed rate cuts for the rally to continue, all they need is solid earnings growth.” Kristy Akullian, Head of iShares Investment Strategy, Americas, told the Los Angeles Times.
But eventually, even earnings will feel the squeeze of a contracting economy. After all, how much can out-of-work Americans spend, especially with everything continuing to cost more month after month? While rampant credit card debt has kept spending afloat thus far, depending on continued strength in that department is akin to counting on the structural integrity of a house of cards.
Now, that isn’t to say that a stock market crash is the base case, nor a guarantee of a recession. Rather, it’s a notice that conditions have clearly changed. Whether or not this results in the market correction many have been warning of remains to be seen.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
