Strategist named two factors that can cause a correction in the stock market

A strategist at BCA Research warned of a possible correction in the US stock market: the highs of US indices, in his opinion, are held on two shaky pillars - the stability of the economy and the hype around AI. He pointed to a hidden rise in unemployment and a deteriorating housing market. The AI sector, despite its long-term potential, is also vulnerable: a slowdown in consumer spending will hit the advertising revenues of companies such as Meta and Alphabet. According to the analyst, the accumulated vulnerabilities are already enough for investors to keep their finger on the eject button."

A weak economy and reduced euphoria around AI could trigger a correction in the stock market, according to Peter Berezin, chief global strategist at BCA Research. His opinion is quoted by MarketWatch. On Thursday, the Dow, S&P 500 and Nasdaq indexes hit all-time highs, but the analyst notes that the rally is holding on to just two pillars - the stability of the economy and the excitement around AI. He warns that for some time the market may ignore the warning signals that indicate the imminent weakening of these two pillars.

Berezin points to weakness in the labor market as one of the signs that the U.S. economy is vulnerable. "The slight rise in the unemployment rate masks the fact that many people have stopped looking for work. If you include those who are not in the labor force but still want a job, the unemployment rate would have risen 0.76 percentage points since January," the analyst said. The housing market is also becoming "increasingly shaky" and global economic growth in recent months has been supported mainly by outperforming purchases amid duties, he said.

The AI sector, according to the expert, is also vulnerable to cyclical downturns, even despite its long-term potential. According to BCA, companies like Meta Platforms and Alphabet are heavily reliant on advertising, and if consumer spending slows, their revenues could fall sharply. "Past experience shows that investors get nervous when free cash flows fall," BCA reminds us. That's exactly what happened at the end of 2021, when the combined cash flows of giants such as Amazon, Google, Meta, Microsoft and Oracle temporarily went south.

According to BCA's estimates, the peak of capital expenditures of the largest technology companies will only occur in the second half of 2026. However, shares of AI-related companies, which already account for a third of the S&P 500 index capitalization, may start falling much earlier. That would hit consumer spending through the wealth-reduction effect. "While it's impossible to pinpoint the exact moment global stocks peak, there are already enough vulnerabilities to keep your finger on the eject button," Berezin summarized.

It is difficult to predict the moment when the fall starts, the analyst emphasizes, as it is rarely caused by a single factor. Past sharp corrections show: sell-offs start because of a combination of events. "Asking what will cause the next stock market crash is like asking what snowflake will trigger an avalanche," says the BCA Research strategist.

For example, Berezin recalled the largest single-stage stock market crash in U.S. history in 1987. The so-called Black Monday occurred against the backdrop of a growing U.S. trade deficit and a falling dollar, which heightened fears of a possible Fed rate hike. At that time, the yield on ten-year government bonds rose from 7.1% to 10% during the year, while Congress was simultaneously considering a bill to limit tax benefits for mergers. All of this piled on top of a market with inflated valuations. Similarly, the fall in 1998 was due not only to the collapse of hedge fund Long Term Capital Management, but also to the bankruptcy of Peregrine Investment Holdings, Asia's largest private investment bank. Investors also feared a devaluation of the yuan and then the Russian default. Even the dot-com bubble in 2000 cannot be reduced only to the revaluation of stocks, the analyst emphasized. There, the resumption of Fed rate hikes and a sharp increase in the supply of securities played a role - the net issue of shares increased from $9 billion in 1999 to $59 billion in just the first quarter of 2000.

This article was AI-translated and verified by a human editor