Investing.com -- US equity markets are set for a testing year as vulnerabilities within the market begin to surface, according to the CEO of deVere Group, a major independent financial advisory and asset management organization. Nigel Green, the CEO, has warned that the remarkable rally seen over the past two years, which ranks in the 93rd percentile for the last century, has left the equity markets more prone to corrections.
The stability of equity markets will heavily depend on earnings growth, but there are clear signs of potential short-term turbulence. Green has expressed concern over investors' complacency regarding inflation and interest rates, predicting that US interest rates could escalate beyond 5%, a level that the market has not adequately accounted for.
Green further stated that the market's assumptions about inflation and rates are dangerously optimistic. Persistent inflationary pressures, spurred by supply-side constraints and wage growth, increase the likelihood of additional rate hikes. Consequently, bond yields are expected to rise, with 10-year Treasury yields likely to exceed the 5% mark.
These trends have significant implications. Increasing bond yields compete with equities, exerting pressure on stock valuations, especially in sectors that have thrived in low-rate environments. Elevated yields also indicate potential weaknesses in economic growth as borrowing costs increase, affecting corporate profitability and consumer spending.
Green emphasized that investors should brace for the dual threat of higher rates and slower growth. He noted that the robust earnings growth observed over the past two years has been a primary driver of market performance. However, the sustainability of this trend is now questionable. As central banks maintain their aggressive stance to fight inflation, the risk of an economic slowdown grows.
Green warned that any disappointments in economic data or earnings could trigger market corrections. He urged investors to adopt a cautious approach and prepare for heightened volatility. He stressed that although the long-term outlook for equities remains positive, thanks to technological innovation and structural shifts in the global economy, the path forward will not be without turbulence. The market needs to absorb the extraordinary gains of recent years, and this adjustment period could present itself as a correction.
Green concluded by advising investors to be proactive in adjusting their strategies to accommodate the changing macroeconomic landscape. He warned that waiting for the storm to hit could be expensive. While equity markets are anticipated to progress over the year, driven by earnings growth, the journey will be riddled with risks. Rising bond yields and potential disappointments in economic data or earnings pose significant threats that could disrupt the rally. He urged investors to prepare for volatility, manage risk diligently, and remain focused on long-term opportunities.
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