The stock market is sending mixed signals at the moment, caught in a tangle of overlapping anxieties. Predicting its next move depends heavily on which narrative you want to believe.
You could choose door No. 1 and subscribe to the dominant concern of the week: A number of high-profile bankruptcies in consumer-facing industries may have exposed an underlying economic weakness that threatens parts of the banking sector.
A small number of regional banks have reported some bad loans this past week. The bankruptcies of a major auto parts company and a subprime auto lender have exposed bigger lenders, including JPMorgan and Wall Street finance company Jefferies, to potentially significant losses.
A number of the lenders are alleging they were victims of fraud. But if you believe these are canaries in the coal mine – and not a series of isolated incidents – it might mean a growing number of consumers won’t be able to pay back their loans or may rein in their spending with companies that owe banks a bunch of money. That could drag down lenders that are most susceptible if the economy really starts to take a turn for the worse.
To paraphrase JPMorgan CEO Jamie Dimon this week, these bank problems may be cockroaches that could signal the presence of other hidden cockroaches.
Markets hit their most recent record just last Wednesday. But they started to stumble after China ramped up export controls on key rare-earth minerals that the Trump administration has been negotiating for months to free up. Those rare-earths are used in practically everything that beeps, including consumer electronics and military equipment.
President Donald Trump last Friday said he’s had enough, threatening a major re-escalation of the global trade war. He said he’d send China’s tariffs higher by 100 percentage points and saw no need to meet with Chinese leader Xi Jinping in a high-profile planned meeting in South Korea later this month.
Trump and his administration quickly walked back those threats, confirming a Xi meeting was still on. And today Trump said he understood significantly higher tariffs on China wouldn’t be sustainable.
But Trump has changed his mind on tariffs before, and it’s too soon to count out a major escalation in trade tensions. If that happens, Morgan Stanley analysts predicted the market could quickly tumble 11% into a correction.
Big Tech and the promise of AI have fueled the historic rise in stocks this year, particularly since April. But analysts have warned in recent months that this is a one-legged stool – and AI companies’ high valuations can’t support the market forever.
Some see echoes of the dot-com bubble in the late 1990s that went bust in the early 2000s. Stocks have never been pricier as measured by the ratio of share price to companies’ actual sales. And the top eight most valuable stocks on the market – all worth north of $1 trillion – are all heavily invested in AI.
All that froth suggests to some that valuations have gotten out of whack with reality, and the AI-powered gains are due for a serious reality check.
Still, bubbles are notoriously hard to predict, and Wall Street’s majority opinion appears to be that the run-up in AI stocks as just the beginning of a long-run trend that will power the stock market for many years to come.
Adventure No. 4: Stagflation and the Fed
Investors have largely ignored the economic impact of President Donald Trump’s tariffs over the past six months, as prognosticators’ worst predictions about high inflation and a slowing economy have failed to come to fruition.
However, inflation is on the rise, albeit slowly. Hiring has slowed to a crawl. Trade with the United States has slowed due to higher tariffs. And some consumers have been jostled by rising prices, with delinquencies and subprime debt rising for lower-income tiers.
Ironically, cracks in the economy have helped drive stocks higher, because the underperforming job market forced the wait-and-see Federal Reserve to lose patience and start its recent rate-cutting campaign.
But the Fed may not be able to cut rates for long if so-called stagflation – high inflation and stagnant economic growth – becomes a real concern. At that point, the Fed may be forced to deal with an inflation problem all over again.
Geopolitical tensions could be easing in Ukraine and the Middle East, and meetings are lined up between Trump and his Chinese counterpart; and with Russia’s President Vladimir Putin. As with the recent ceasefire in Gaza, those meetings have the potential to turn down the temperature, at least somewhat, in some of the most concerning parts of the globe.
Meanwhile, worries about oversupply have pressured the oil market, with the price of Brent and WTI both at near five-month lows – potentially easing the inflation burden for Americans, if gas prices follow oil prices lower.
And the latest concerns about regional banks, though bringing back bad memories of a couple years ago, may prove to be as contained as the regional bank crisis of 2023.
More bad headlines may continue to jostle the markets in the near-term. But not much has really changed: Stocks are down just about 2% from their record high. If they fall further, that could present a good buying opportunity to get back into the market when stocks are relatively cheap.
“We would view deeper pullbacks as opportunities to lean in, as the bull market still deserves the benefit of the doubt,” said Keith Lerner, chief market strategist at Truist, in a note to clients Friday
Put another way: “We are keeping our powder dry and ready to buy the dip,” said Mohit Kumar, chief economist at Jefferies.
