3 big risks to the stock market's record high
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The S&P 500 hit its fifth all-time high of the year Monday, with consensus building around more to come as we enter the second half of the year.
- But strategists warn this stock market rally is not risk-free.
Why it matters: Institutional investors are scarred from missing out on the April snapback, which could be priming them for a bias toward optimism that misses three big potential risks.
Between the lines: Strategists are cautious about these issues.
- Economic weakness: Inflation could worsen as tariffs hit the data, or the labor market could worsen.
- Dollar declines: Ongoing dollar weakness could drive further inflation and fuel a rotation away from dollar-denominated assets, including stocks.
- Valuation bubbles: With stocks trading at 22 times earnings, above historic levels, are we priced to perfection?
The intrigue: The list doesn't mention tariffs since investors don't really view tariffs as an earnings headwind anymore, as we reported.
Zoom in: The risks are slowly trickling into the economic data, and frothiness is showing up in technical market indicators.
- Continuing jobless claims continue rising, and recurring applications for unemployment benefits are at the highest level since 2021, a sign that it is taking jobless Americans longer to find a new job.
- Layoff rates remain low, but so is hiring. As of April, the hiring rate was consistent with that seen in the 2010s when the unemployment rate was over 6%.
- Consumer spending fell in May for the second time in 2025. If the shopping retreat continues, it could weigh on corporate earnings.
- The Bloomberg fear and greed index hit the highest level of greed since March of 2024 after stocks notched the record last Friday.
- Muted market participation is indicated by the ratio of the equal-weighted S&P 500 to the cap-weighted index hitting its July 2024 low.
What they're saying: Joe Brusuelas, principal and chief economist at RSM US, says equity valuations are not sustainable.
- He is concerned about investors pricing in over a 90% chance of rate cuts by September given inflation risks and currency exchange rates.
- Believing in rate cuts that soon is "a little bit like going to see that cool F1 movie…It's gonna require the suspension of disbelief to truly enjoy it," he says.
Yes, but: It has not paid off to bet against market strength this year, with the S&P 500 up 5.4% year to date.
What we're watching: Look at market leadership for clarification on how healthy the current rally is.
- While large-cap tech drives gains thanks to its weight in the S&P 500, it is the fifth-best performing sector this year, a potential sign of broadening market strength.
The bottom line: If the volatility of the first half of the year got you seasick, diversify your portfolio.
- There's plenty of growth, especially outside of the U.S., to go around.
Courtenay Brown contributed.
