The 3 Major Risks for the Stock Market: Why U.S. Stocks Are Essential in 2024

The US Stock Market: Current Trends and Risks

The US stock market has been experiencing volatility since the beginning of the year, with some risks looming over the rational exuberance that has been driving the markets so far.

The S&P 500 and the tech-heavy Nasdaq closed at record levels earlier this week, only to experience a pullback on Thursday, dipping below 40,000 for the Dow Jones and 5300 for the S&P 500.
This slight profit-taking is a healthy sign.
The US stock indices have surged by around 10% (Dow Jones) and 13% (Nasdaq 100) since the beginning of the year, as of January 1, 2024.

Key Risks to Consider

There are three main risks to watch out for:

1. The Federal Reserve’s monetary policy
2. A potential unexpected recession
3. Weaker-than-expected corporate earnings results

Nvidia, a prominent AI chip manufacturer, has played a significant role in driving the stock market rally.
Starting the year at $475, Nvidia’s shares soared past $1000 post their quarterly earnings release, reaching a market capitalization of $2.5 trillion.
Despite this rapid surge, Nvidia’s P/E ratio stands around 48x, even lower than its 75x ratio a year ago in May 2023.

The Role of Nvidia in the Market

Nvidia exemplifies the revolutionary impact of generative AI and has been a frontrunner in the recent market upswing.
Its shares jumped by 90% in 2024 alone, driven by substantial profit growth, outpacing the price surge.
Nvidia’s success reflects the market’s optimism for AI’s potential to boost global corporate productivity and wealth, underpinning positive market sentiment.

While Nvidia shines, disappointing Q2 earnings announcements from other companies could potentially dampen market sentiment, akin to the dot-com bubble burst in 2000 triggered by Cisco’s underwhelming results.
Nonetheless, current companies boast stronger profitability than the dot-com era, potentially mitigating severe market impacts.

Market Analysis and Federal Reserve’s Impact

Another critical factor to watch is the Fed’s interest rate hikes to combat inflation, which could affect market dynamics.
Market analysts anticipate a possible rate cut by the end of the year, balancing economic growth considerations.

It’s crucial to monitor economic indicators closely, as unexpected data fluctuations can shift market dynamics.
Investors are currently navigating the fine line between market fears and substantial cash reserves awaiting attractive buying opportunities amid market corrections.

Despite prevailing risks, long-term investors are advised to weather market fluctuations with a steady hand, leveraging past crises as buying opportunities.
Ultimately, prudent risk management and enduring market exposure are key to long-term investment success.