- The stock market has a negative scenario that could cause the S&P 500 to fall by more than 20%, according to UBS.
- The bank highlighted three big risks that investors should keep in mind even as all-time highs are reached.
- A possible recession, rising inflation and geopolitical turmoil loom over investors.
as plain the stock market rises to record levels, There are imminent risks that could lead to a sharp sell-off later this year, according to a recent UBS note.
The bank highlighted a bearish scenario for the stock market that would send the S&P 500 falling 23% to 3,700, which is just above the depths reached during the October 2022 bear market low.
According to David Lefkowitz, chief investment officer of U.S. equities at UBS, there are three risks that would drive such a bearish scenario later this year.
The first is for the United States to fall into a "full recession" in the next six to 12 months, according to the note.
While many economists have come to the idea that a recession is ruled out this year, Lefkowitz said the delayed effects of the Federal Reserve's interest rate increases, combined with declining household cash reserves, could lead to an economic slowdown.
The Federal Reserve raised rates 11 times between 2022 and 2023, and the impact of those increases may take more than 12 months to hit the economy. That timeline would suggest weakening in the second half of 2024.
Another risk for the stock market is that inflation remains high, which would be a rude awakening for the economy and consumers, as expectations have been building that a steady decline in inflation would allow interest rate cuts by the Federal Reserve.
But if inflation remains high, "central banks will be forced to raise interest rates further or keep them at high levels for longer than expected," Lefkowitz said. That would fuel the risk of stagflation and could lead to a wage-price spiral.
The latest risk is an increase in geopolitical unrest, which has already been elevated due to ongoing conflicts between Russia and Ukraine, Israel and Hamas. The Houthi rebels and the United States.and Rising tensions between China and Taiwan.
If geopolitical tension points get out of control, they could disrupt energy markets and drag even more countries into hostilities. The possibility of rising energy prices would stoke inflation fears, which could affect the Federal Reserve's plans to cut interest rates.
Together, it is these three risks that could end the current bullish streak in stocks and usher in a new bear market that tests the lows seen in 2022, according to Lefkowitz.
