It's going to be a long summer for the stock market
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- The stock market is headed for a disappointing few months.
- Stocks are more likely to post flat or negative returns by the end of the year, two investing vets told BI.
- Stock prices are already sky-high, and there's not much that could propel them further, they said.
It's about to be a cruel summer for investors, with the market likely to flatline or undergo a correction over the coming months, Wall Street veterans speaking with Business Insider predicted.
David Morrison, a market analyst at Trade Nation, is dubious about the latest rally in stocks, with the S&P 500 and Dow Jones Industrial Average both hovering near records following a cooler April inflation reading.
The rally in itself is problematic for stocks, he warned, as they're already so expensive that it's hard to imagine the market moving higher from here. He sees the benchmark index being prone to multiple sharp corrections of at least 10%, ending the year around 4,500.
"The next move will be down, rather than up," Morrison said.
The view puts him at odds with the growing number of bulls in the market who see an eventual rate cut from the Federal Reserve as a strong positive catalyst.
However, Morrison thinks the Fed's first rate cut could easily be postponed another three months—meaning no cut this summer or possibly no cuts at all this year. All it would take is one hot inflation reading to dash the prospect of Fed rate cuts this year altogether, he said.
"Investors are suffering from a large dose of FOMO, and I'm concerned that we could be in the process of a blow-off top with echoes of the moves seen back in early 2020," Morrison told BI, pointing to the pandemic stock crash. "I think the air up here is quite thin. While there's no obvious catalyst for a sell-off, it's hard to discern what could help to lift equities much higher from here."
Will McGough, the director of investments at Prime Capital Investment Advisors, sees the S&P 500 ending the year basically flat to where it's currently trading. Stocks are already so expensive, and the Fed has no urgent need to lower interest rates. Rates have hovered between 4%-5% in the past without causing a recession, he noted.
"It's getting everybody used to how things should be versus the way things have been," he said of interest rates, suggesting steep rate cuts aren't in the cards.
Investors are also facing a slew of obstacles in the back half of the year that will prevent stocks from moving higher, Morrison and McGough both warned.
The US economy faces a decent chance of recession over the next year, Morrison said. He pegs the odds of a hard-landing at around 60%, similar to the New York Fed, which sees a 50% chance the economy could tip into a downturn within the next 12 months.
A number of recession indicators have already been sounding the alarm for the US economy. The 2-10 Treasury yield curve, the bond market's notoriously accurate recession indicator, has been inverted since July 2022, which is one of the biggest indicators that a recession is on the way, Morrison said.
Economic growth already is starting to slow. GDP slowed to just 1.6% over the first quarter, while key sectors of the economy, like manufacturing, have been contracting for months on end.
"I think it's going to become a lot rockier as we go along. And I think we should also be prepared to see some nasty aggressive selloff along the way," Morrison said.
While McGough thinks a recession is unlikely, he sees more volatility in the second half of the year, especially ahead of the presidential election in November.
"Political volatility is, in itself… going to trip over stock market volatility," McGough warned.
Other strategists have also warned of a rocky road ahead for stocks. More extreme forecasters have predicted a market crash as steep as 65%, as equities mirror previous bubbles.
"Have fun this summer. You're probably going to come back without the material move one way or the other," McGough said.