It's time for Wall Street to confront market risks
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Illustration: Sarah Grillo/Axios
Wall Street is in digestion mode, with a summer rally behind investors and the door nearly closed on a better-than-expected earnings season.
Why it matters: Without flashy earnings growth to power stocks forward, investors may now be forced to consider the market risks they brushed aside all summer.
What they're saying: "I think people are nervous about a pullback because they know, at some point between now and year-end, it would be a very long streak to go without even a 5% pullback," Keith Lerner, co-chief investment officer at Truist, tells Axios.
- Lerner adds that the tech sector is in a digestion phase, but he views any pullbacks as buying opportunities.
- A 5% pullback more broadly is "just the admission price to being in the market," he says.
Zoom in: It's not hard to find risks that strong earnings temporarily overshadowed:
- 📉 The jobs market is on shaky ground.
- 🏛️ The independence of the Federal Reserve is under threat.
- 🔥 Inflation is above the Fed's target, and interest rate cuts could be near.
- 📦 It's unclear how tariffs will impact prices and consumer spending.
- 💵 Treasury yields are ticking higher, a potential headwind for stocks.
- 💰 Stocks are expensive.
Between the lines: Lerner notes that sentiment in the market is shifting but not necessarily because of risks. Investors are simply seeking new opportunities as the catalysts driving the market change.
- Rate cuts are defining the market now that earnings season has mostly wrapped up, leading to rallies in rate-sensitive corners of the market like real-estate investment trusts (REITs) and utilities.
- This kind of rotation is "characteristic of a bull market," he says.
Yes, but: Stocks move off company earnings, and with 12% earnings growth this quarter, it makes sense that stocks rallied.
- "It's hard to say we're in this precipice of a big decline, because the earnings side of the market remains strong," Lerner says.
What we're watching: The risks outlined above haven't put direct downward pressure on earnings — yet.
- If they do, that could be a reason for investors to take these risks more seriously.
