Tom Essaye, formerly with Merrill Lynch and now publisher of Sevens Report market commentary, has highlighted potential ‘scary’ scenarios for investors. Essaye believes that while the outlook for stocks and risk assets remains positive, a confluence of negative events could drastically alter the market landscape. He cautions that financial media may not be accurately portraying the true risks present in the current market environment.
Essaye’s first concern involves a potential AI bubble. Despite a lack of widespread concern, he notes red flags and warns against dismissing bubble talk entirely. A burst in AI enthusiasm could trigger a 10 to 20 per cent drop in the S&P 500 due to negative earnings revisions, especially given the tech sector’s significant contribution to the index’s earnings growth. Essaye also points to rising consumer credit stress as a second potential risk. With income growth slowing and prices rising, consumers are struggling with payments, potentially leading to a surprise negative impact on overall consumer spending.
Finally, Essaye identifies a weakening US labour market as a third concern. He questions the extent of this weakness, noting that markets are currently pricing in only a slight deterioration. A more significant downturn in the labour market, coupled with the AI bubble deflation and consumer credit issues, could create a ‘horror movie’ environment. This scenario could result in a substantial and prolonged decline in the S&P 500.
Essaye clarified that he is not predicting this worst-case scenario but believes it is a legitimate possibility that investors should be aware of. He suggests the current market outlook may not be as uniformly positive as stock prices suggest, and vigilance is warranted.
