When Will the Stock Market Fall 20%?

The market dropped almost 20% in April. It is now 34% above its 52-week high. There is no single reason to think it will stop rising, except that it is already rising. The market is expensive, based on S&P ratio yardsticks. However, strong earnings, particularly in the big tech sector, can offset this. Big tech rules the market value. Big tech earnings were super.

Some earnings were soft. But not too soft. Walmart Inc. (NYSE: WMT) and General Motors Co. (NYSE: GM) were concerned about inflation, but not enough to significantly alter their forward-looking projections. Market laggards, such as IBM Corp. (NYSE: IBM) and Ford Motor Co. (NYSE: F), continue to be market laggards. Dogs that have been dogs are not going to be a drag.

Artificial intelligence (AI) has driven much of the market run-up. Whether that should be the case is up for debate, but hundreds of billions of dollars are being spent on server centers. That means AI believers have not cut back.

Tariffs and Inflation

What is the conventional wisdom about a market reset? Most arguments revolve around inflation. It is not inflation that steals consumer spending based on traditional triggers. It is inflation that will occur all at once due to tariffs. Whether this will harm consumers remains to be seen.

One advantage consumers have in a period of historically high tariffs is that businesses absorb them and do not pass the price increase on to customers. The fear is that burdening the customer’s spending could cut back sales.

One event could make tariffs academic. Recent court decisions have ruled that the U.S. president cannot impose tariffs, only Congress can. If this decision reaches the Supreme Court and is not overturned, the remarkably high tariffs that President Trump recently implemented will be essentially eliminated.

Taken as a whole, these facts point to one conclusion. Without tariffs, the market is unlikely to experience a sell-off anytime soon.

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