These are the three big risks for the stock market, says economist

The US stock market has collapsed. But there are risks that threaten to undermine the euphoria.

The three “primary” risks are Federal Reserve policy, a surprise recession and lower-than-expected corporate earnings results, David Rosenberg, founder and president of economic consultancy Rosenberg Research & Associates, said Wednesday. CNBC’s Financial Advisor Summit.

The S&P500 and technically demanding Nasdaq closed at a record high on Tuesday. U.S. stock indexes are up about 11% each so far in 2024, as of about 3:00 PM ET on Wednesday.

Nvidiaa maker of artificial intelligence chips, has played a major role in the stock market’s rise, market analysts said at the FA Summit.

The company, an “example of generative AI,” was “single-handedly responsible for the final phase of this bull market,” Rosenberg said. It’s up 90% in 2024 alone, as of around 3pm ET on Wednesday.

Nvidia is “certainly a poster child” for the more positive sentiment in the stock markets, Brandon Yarckin, COO of Universa Investments, said at the FA Summit.

Nvidia reports quarterly results after the market closes on Wednesday.

Disappointing results can cause the stock market to fall, Rosenberg said. It would be similar to what happened around the dot-com boom in 2000, when missed earnings results from Cisco ended the tech mania, he added.

In addition, Fed policymakers have raised interest rates to their highest level in 20 years to rein in high inflation. It is unclear when the Fed will cut borrowing costs; many market forecasters expect to do this at least once by the end of the year.

High interest rates have driven up the gains investors can make from cash and money market funds, where they can earn, for example, 5% returns, Rosenberg said. Keeping rates high for longer gives cash and money market funds an advantage over stocks on a risk-reward basis, he said.

Moreover, the US economy has remained strong despite high borrowing costs and the gradual decline in inflation. That has led many forecasters to predict that the economy is heading for a ‘soft landing’.

If a recession were to occur that no one sees coming, it would be a “big surprise” that threatens the stock market, Rosenberg said.

Surprise and uncertainty – both economic and geopolitical – are two of the things investors hate most, Carla Harris, senior client advisor at Morgan Stanley, said at the FA Summit.

Still, long-term investors should resist the temptation to jump ship if and when the market falters, experts say.

The wealthiest and most successful investors “stay in the markets longer,” says Raj Dhanda, partner and global head of wealth management at Ares Management Corporation.