U.S. equity markets could be headed for a correction due to a confluence of factors like the growing divergence from "Magnificent 7" stocks and President-elect Donald Trump's tariff plans, according to market expert Jay Woods.
What Happened: In an interview with CNBC, Woods, chief market strategist at Freedom Capital Markets, cautioned about the possibility of a market correction in the near term.
According to Woods, we could be at the beginning of a 10% correction in the equity markets. Woods noted that these corrections happen roughly once every 18 months.
"We've had a tremendous run, 10% correction is due to happen every 18 months… What we're seeing is just horrible market breadth," Woods said.
Woods added that while the "Magnificent 7" stocks — Apple AAPL, Microsoft MSFT, Google parent Alphabet GOOG GOOGL, Amazon.com AMZN, Nvidia NVDA, Meta Platforms META and Tesla TSLA — have done well, the divergence in their performance and that of the overall market is "getting a little bit too rich" for him.
"Once we get to the new quarter, we're going to have some headwinds to deal with. We may see some of those Mag 7 names give back a little bit. I don't think the rotation will keep us from having a 10% correction."
"It's not going to be fun," he quipped.
Woods also pointed to uncertainty due to Trump's tariff plans as a possible headwind that could have an impact on the markets.
Elon Musk and Vivek Ramaswamy-led Department of Government Efficiency's (DOGE) plans to cut down federal spending could also result in an uptick in unemployment, said Woods.
Why It Matters: The potential for a market correction has been echoed by other financial experts.
Brian Arcese from Foord Asset Management has also raised concerns about the slowing U.S. economic growth and corporate earnings, which could trigger a correction if they continue to decelerate. Arcese pointed out that the S&P 500 has been “expensive for quite a while,” with a price-to-earnings ratio exceeding 27.
Additionally, Jeremy Siegel, professor emeritus at the University of Pennsylvania's Wharton School, described a recent stock market downturn as a “healthy” reaction to the Federal Reserve’s cautious approach to future interest rate cuts.
The Fed’s decision to lower interest rates by a quarter percentage point led to declines across major Wall Street indexes, as investors had anticipated more aggressive rate reductions.
Billionaire investor David Einhorn characterized the market as “really, really, really pricey,” noting that the Shiller cyclically adjusted price-to-earnings ratio is at one of the highest levels in a century.
Despite these high valuations, Einhorn clarified that this does not make him bearish, as asset prices can remain mispriced for extended periods.
Price Action: According to Benzinga Pro, as of Friday’s pre-market session, the SPDR S&P 500 ETF Trust SPY, which mirrors the S&P 500, has gained 1.68% over the past five days. Similarly, the Invesco QQQ Trust QQQ, which tracks the Nasdaq-100 Index, has risen by 1.65% during the same period.
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