Stocks are defying gravity — but investors say these triggers could spark a ‘sizeable’ correction
Global stock markets are soaring, with U.S. indexes continuing to rally and the Stoxx Europe 600 , FTSE 100 and Spain’s IBEX all hitting record highs last week. But some investors are now warning that a wave of rising risks — from weaker consumer spending to faltering earnings growth and a potential bond market revolt — could bring equities back down to earth with a bump, sooner rather than later. Nicholas Brooks, head of economic and investment research at global alternative asset manager ICG, said the recent slowdown in U.S. hiring could cause consumers to pull back, hitting growth faster than markets expect. Amazon last week announced its largest-ever round of layoffs , with up to 30,000 employees at risk of redundancy. Microsoft and Meta are also among the 200 technology companies reducing headcounts this year. .STOXX .SPX 1Y mountain Stoxx 600 Europe and S & P Brooks told CNBC that any threat to the prevailing “goldilocks” mix of falling inflation, lower interest rates and solid growth could potentially spark a “sizable” equity correction. Delinquency rate Rising delinquencies in U.S. credit cards and auto loans also point to broader economic weaknesses, according to Lee Robinson, founder and CIO of Altana Wealth, which runs several credit, event-driven, crypto and special situations hedge fund strategies. Robinson told CNBC that the recent high-profile collapses of Tricolor and First Brands in the U.S. raise deeper questions about the auto loan market. “For now, investors are brushing it off as contained damage rather than anything systemic. Spreads have widened, albeit very modestly,” Robinson said via email. “But the biggest macro takeaway from all of this is that lower-end consumers are struggling as they simply cannot afford to make car loan repayments. “We view this as a red flag for the health of the U.S. economy.” ‘Growth freeze’ scenario A sudden consumer slowdown forms part of a wider “growth freeze” scenario, said Charles-Henry Monchau, chief investment officer at Syz Group. “U.S. lower- and middle-income consumers, squeezed by rising prices or steep financing costs, could rein in spending. The AI investment cycle could sour, as companies start cutting jobs to defend margins and capital spending falters when lofty expectations prove hard to meet,” Monchau told CNBC. With valuations already stretched, disappointing earnings — coupled with softer demand arising from China’s inward turn, and fiscal strains in the West — could trigger a sharp sell-off, Monchau warned. “A 15–20% correction might be enough to turn a slowdown into a self-fulfilling downturn,” he added. Inflation surge Monchau’s second risk scenario — an “inflation heatwave” — sees fiscal “largesse” and a rebound in corporate and household borrowing pushing growth into overdrive, sending inflation surging. “Here, central banks – especially the Fed – stay too comfortable for too long, reluctant to tighten. At the same time, a flare-up in trade conflicts could snarl supply chains, and any geopolitical shock might push energy prices sharply higher.” ICG’s Brooks said investors betting on U.S. rate cuts toward 3% next year could be wrongfooted if sticky inflation and tariff-related price hikes force the Fed to hold firm. “A reassessment of Fed rate cuts would likely ripple through rates markets and hit equity markets quite hard,” Brooks said in an email. Bond revolt Meanwhile, patience among bond investors — who have been willing to give the U.S. government the benefit of the doubt — may now be wearing thin. US10Y 1M mountain U.S. 10-year Treasury. “Bond markets tend to be calm until all of a sudden they’re not,” said Brooks. He suggested that the “unsustainable” build-up of U.S. government debt — which he said is now at its highest level since World War II — is the biggest medium-term risk to markets. “Unless there is a change in fiscal policy that credibly puts U.S. government debt on a more sustainable trajectory, it is likely just a matter of when, not if, bond market investors revolt,” he added. Monchau warned of the risks of a jump in bond yields. “With equity valuations already near historical peaks, a spike in bond yields would likely send stocks reeling – especially the high-flying growth and tech names that have driven much of this bull run,” he added. Meanwhile, Henry Neville, portfolio manager within Man Group’s Solutions unit, said lenders will need more convincing to finance what he called “profligate” governments. ” France might be the spark , but the tinderbox is Western governments in general spending excessively,” Neville observed. Trade war woes Trade wars also remain a live risk. Man Group’s Neville noted how U.S. President Donald Trump has taken the U.S.’s effective tariff rate from 2% to 19%, the highest level in almost a century. “If you’re sympathetic to him, you’d say he was a dynamic decision maker. If you’re not, you’d say TACO ,” Neville said in a market commentary, referring to the “Trump Always Chickens Out” acronym, coined by a Financial Times columnist . “Either way, a lack of consistency breeds uncertainty and uncertainty costs money,” he added. “Nothing comes for free, and for me, it’s going to be U.S. corporates picking up at least part of the tab.”
