The U.S. stock market has been in a bull market since the low point reached in March 2020. This bull market began after the sharp decline in stock prices triggered by the COVID-19 pandemic, which led to a rapid rebound driven by unprecedented fiscal and monetary support, which was accompanied by a recovery in economic activity.

The stock market's recent performance has been impressive, with major indices reaching new highs and investor sentiment remaining optimistic. Given the strong momentum and current valuations, it is important to monitor the factors that could derail market trends. Beese Fulmer’s investment committee believes the risk of elevated inflation, an increase in geopolitical tensions, overhyped expectations around artificial intelligence (AI), and political uncertainties surrounding elections must be monitored and considered when making investment decisions in clients’ portfolios.

Inflation is likely the biggest threat to this bull market. Inflation reduces purchasing power of consumers, leading to lower consumer spending. If the company cannot raise prices or cut costs to offset the demand, profits will drop, and stock prices will follow suit. This can hurt corporate profits and, subsequently, stock prices. The Federal Reserve responded to high inflation by raising interest rates, with the goal to further dampen economic activity. Everyone knows the U.S. has experienced a period of high inflation, the Consumer Price Index (CPI) reached levels not seen in decades. In 2023, inflation rates peaked at 9%, driven by supply chain disruptions and increased demand post-pandemic. Inflation has since pulled back off its highs, however, if inflation remains persistent at these levels, the Federal Reserve will have to go against market expectations, which that they will cut rates this year. Holding rates at current levels for longer than expected could weigh on market expectations and in the event rates needed to go higher, both stocks and bonds would suffer.

Geopolitical tensions can create significant volatility in financial markets. Conflicts, trade wars, and international disputes can lead to uncertainty, disrupt global supply chains, and affect investor confidence. The Russia/Ukraine war is the latest event to weigh on supply chains and investor confidence. In addition to this war, further escalating tensions between major economies such as the U.S. and China can result in additional tariffs and trade barriers, impacting global commerce and corporate earnings by disrupting demand.  Geopolitical tensions can also throw more wood on the inflation fire.

Stock market euphoria has occurred in many forms throughout history i.e. real estate, dot.com, hydrogen fuel, cannabis to name a few. While AI presents significant long-term opportunities, there is the risk that the current hype has led to inflated valuations. Companies promising revolutionary AI technologies must deliver growth at or above market expectations, otherwise multiples on these stocks will re-rate and prices will come down from recent highs. We believe it is important to focus on fundaments of the companies benefiting from AI technologies and refrain from speculative companies that have a business model that is not proven to produce profits. In addition, as companies become larger positions in a portfolio it is important to remain diversified in the event the implementation of AI technologies does not progress as rapidly as anticipated.

The markets appreciate predictability. When we review the 2024 election cycle, it is full of unknowns and the unknowns are growing as November approaches. Elections lead to shifts in policy direction, regulatory changes, and fiscal adjustments that impact various sectors differently. With a chance of a candidate dropping out, the predictability of policy influences is low. If a candidate were to change at this late in the cycle or if the election results are not clear shortly after election day, market volatility will increase, potentially derailing the bull market.

The stock market's recent performance has been robust and will continue if the economy continues to grow with inflation moderating further, however it is prudent to monitor what could derail the current bull market. Scott’s article, “Don’t Put All Your Eggs in One Basket’’, highlights the importance of holding a well-diversified portfolio and understanding your exposure to companies with high valuations. At Beese Fulmer the investment committee focuses on understanding and preparing for these risks, so they can better navigate potential market turbulence and protect clients’ portfolios.