6 Economic Frights That Could Haunt Markets This Halloween: 'A Tipping Point For Risk Appetite,' Analysts Warn

As Halloween approaches, LPL Financial warns of six major risks that could spook markets and drive volatility higher in the coming months.

In a note shared with clients on Monday, LPL's analysts—including chief equity strategist Jeffrey Buchbinder, chief economist Jeffrey Roach, chief global strategist Quincy Krosby, and others—cautioned that lurking economic threats may disrupt the current calm in the U.S. stock market.

Here's a look at what LPL Financial analysts see as the biggest potential scares for the U.S. economy.

1. Upper-Income Consumers Feeling Financial Strain

Wealthier households have been propping up consumer spending, helping support the U.S. economy amid inflation and higher interest rates.

However, new data from the New York Federal Reserve shows that upper-income households (those earning over $100,000) are beginning to feel the pinch, with the percentage of these households expecting to miss minimum debt payments now at its highest level since 2014.

"What scares us this Halloween season is the potential stress on the wealthier cohort as more upper-income households reported they will most likely be unable to make their minimum debt payment," LPL Financial writes.

2. Federal Debt Is Ballooning and Becoming Costlier

The federal debt has surged past $35 trillion, up sharply from $31.5 trillion just a few months ago.

The Congressional Budget Office (CBO) projects that large annual deficits of 5-7% of GDP will persist, pushing the debt-to-GDP ratio to 166% by 2054.

“The larger and more enduring risk to fixed income markets remains the amount of Treasury debt needed to fill massive federal budget deficits,” warns LPL Financial.

Rising debt costs could also crowd out other government spending, potentially constraining economic growth over the long term.

Read Also: Deficit Strain In Washington Will Get Worse, IMF Warns: National Debt Projections Revised Higher, Stabilization Unlikely By 2029

3. High Stock Valuations Pose a Risk

U.S. stock valuations are elevated, with the S&P 500, as tracked by the SPDR S&P 500 ETF Trust SPY, trading at a price-to-earnings (P/E) ratio of 21.8, well above the 20-year average of 16.

High valuations indicate that stocks are priced for perfection, which could lead to sharper market corrections if corporate earnings disappoint.

Goldman Sachs recently projected a modest 3% annual return for U.S. equities over the next decade, underscoring the challenges of starting from such a high base.

"Clearly valuations are high, though they are not great timing tools for tactical trading," analysts explain.

Elevated valuations mean any economic setback could trigger a larger-than-normal pullback.

4. Rising Interest Rates Could Pressure Stocks And Bonds

Interest rates have climbed sharply, with the 10-year Treasury yield recently trading in a range between 3.75% and 4.25%. LPL analysts warn that a breakout above 4.3% could lead to turbulence in both stock and bond markets.

Higher rates could dampen consumer spending and hurt businesses with significant debt loads. According to LPL Financial, if Treasury yields break above 4.3%, it could reduce investor risk appetite and create headwinds for equities.

“While the velocity of rising rates often dictates the damage to stocks, we believe a breakout above this resistance level could be a tipping point for risk appetite,” the experts said.

5. Political Uncertainty Ahead of 2024 Election

With the U.S. presidential election approaching, political uncertainty is rising. Potential policy changes, such as the expiration of the Trump-era tax cuts in 2026, could impact corporate profits and consumer spending. In addition, growing political divisiveness could weigh on market sentiment.

Historically, markets rally after elections, but the potential for a contentious outcome could drive short-term volatility.

“Also consider the possibility of another disputed outcome, a very long way for results, and/or intensifying political divisiveness as risks to investor sentiment,” LPL Financial warns.

6. Rising Geopolitical Tensions

Global risks are mounting, from conflicts in the Middle East to tensions with China over Taiwan, a critical hub for semiconductor production.

Any disruption in Taiwan could disrupt global tech supply chains, adding pressure to the U.S. and global economies.

Taiwan Semiconductor Manufacturing Co. TSM is working to diversify its production by building a new plant in Arizona, but full operation isn't expected until 2025.

“Tariffs may be broadened or increased on China regardless of the outcome of the November election. The trend toward ‘de-globalization’ is disruptive and inflationary. There’s plenty to worry about.”

Read Also: ‘Tariffs Are Inflationary’: IMF Deputy Chief Rejects Trump’s Trade Policies As Elections Loom

Keeping an Eye On the Shadows

Despite these risks, LPL Financial advises investors to stay calm and remain fully invested.

“We’re still in a bull market with a growing economy, rising corporate profits, and a favorable technical analysis picture,” the experts highlight.

While valuations are high and debt levels concerning, these factors alone aren't reasons to exit the market.

Read Next:

• November Interest Rate Cut Almost A Done Deal As Blackout Begins: 10 Stocks Surging The Most Since Fed’s Last Decision

Image created using artificial intelligence via Midjourney.