Ahead of the potential market correction, Brian Arcese from Foord Asset Management has highlighted concerns over the U.S. economic growth and corporate earnings. These factors could trigger a correction if they continue to slow down.
What Happened: Arcese warned that a market correction could occur if U.S. GDP or earnings growth slows. Arcese noted that the S&P 500 has been "expensive for quite a while," with a price-to-earnings ratio exceeding 27, CNBC reported on Friday.
"We do think that a correction would be healthy, but you will need some type of catalyst for that correction to take place," he said, highlighting two potential catalysts for a correction: slowing economic growth and inflation increases.
U.S. GDP growth was less than anticipated in the third quarter, and inflation rose to 2.6% in October, as per recent data. He emphasized that high corporate earnings expectations, particularly outside IT and communication services, could also trigger a correction if growth slows.
Arcese remarked on the unusual combination of factors like GDP growth, earnings growth, and falling inflation and interest rates, which he described as rare. He noted that while utilities are more expensive than before, they remain less costly than the broader market, with growth driven by increased electricity demand from data centers and AI advancements.
Why It Matters: The concerns raised by Arcese align with recent warnings from other financial experts. David Einhorn, founder of Greenlight Capital, recently labeled the current market as "the most expensive of all time," citing the high Shiller cyclically adjusted price-to-earnings ratio.
Similarly, Stifel's Barry Bannister predicted a 12% market drop by the end of 2024, driven by high valuations and speculative risks. The S&P 500's price-to-earnings multiple is nearing historic highs, reminiscent of previous market peaks.
Despite these concerns, Goldman Sachs forecasts strong U.S. economic growth in 2025, with a 2.5% GDP boost, suggesting potential resilience in the face of current market challenges.
Price Action: As of Friday, according to Benzinga Pro, the SPDR S&P 500 ETF Trust (NYSE:SPY) that tracks the S&P 500 closely witnessed a 25.60% increase in its year-to-date (YTD) returns while Invesco QQQ Trust, Series 1 (NASDAQ:QQQ) saw a hike of 25.43%. However, during pre-market hours on Friday, both the ETFs were trading slightly lower.
On Friday, futures show a decline across major indices: Nasdaq 100 down 0.51%, S&P 500 down 0.40%, Dow Jones down 0.29%, and R2K down 0.08%.
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Disclaimer: This content was partially produced with the help of Benzinga Neuro and was reviewed and published by Benzinga editors.
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