Three in four Americans believe recent stock gains are “unsustainable” and think the market may be headed for a correction, according to a new survey.
The S&P 500 is up about 13% on the year and trading near its record high. Stocks are surging on enthusiasm over the promise of AI, and on the strength of corporate sales and earnings.
But there is persistent talk of an AI bubble: an irrational runup in the prices of tech stocks fueled by unrealistic expectations for artificial intelligence.
Stock traders worry, too, about soaring oil and gas prices in the lengthening Iran war. Those fears pushed two major stock indexes into correction territory in March, when both the Dow Jones and the Nasdaq dropped 10% below recent highs.
Why do so many Americans think a correction is coming?
Stocks are historically
overpriced. A common yardstick, the cyclically adjusted price-to-earnings (CAPE) ratio, stands at 41.07 for the S&P 500.
The last time – indeed, the only time – the CAPE ratio ranged that high was at the peak of the dot-com bubble, in 1999-2000. The CAPE ratio also spiked in 1929, just before the Great Depression.
All of those factors, along with rising bond yields and borrowing costs, could explain why many Americans think the stock market might be due for a correction.
The new survey, published Sept. 22 by Allianz Life, found that 74% of Americans believe “recent market highs are unsustainable” and a correction may be looming.
“That’s a big number,” said Kelly LaVigne, vice president of consumer insights at Allianz Life. “We never get a response where 74% of the people say the same thing.”
Nearly two-thirds of survey respondents said they are “waiting to make financial decisions because economic conditions are too unpredictable.”
Only 27% said they are “comfortable with current market conditions and ready to invest now.”
The survey reached 1,005 adults in August.
Is the current stock market sustainable?
Whether the current stock market run is sustainable is a matter for debate, investment experts said. The potential for a market correction is not.
“A correction, technically, is just a 10% drop in whatever index you’re looking at,” said Anders Bylund, a contributing media and technology analyst at The Motley Fool.
“They kind of happen all the time. We already had one or two this year, depending on which index you look at. And they lasted a couple of weeks, and then it was back to chasing all-time highs.”
Stock market corrections are not necessarily a big deal, he and other analysts said. More worrisome would be a bear market, typically defined as stocks falling by at least 20% and staying down.
“Those usually last longer and have a deeper effect on what people actually do,” Bylund said.
Bylund said he does not believe the current pace of the stock market is unsustainable. Other observers are divided on whether the market is or isn’t in a bubble.
If stocks are overpriced because of inflated AI hopes, some commentators say, then the record highs of recent weeks are indeed unsustainable, and the bubble will eventually burst, bringing stock indexes down.
If stocks are properly valued, and there is no AI bubble, then a market contraction is not inevitable.
“Unsustainable?” Bylund said. “Pockets and pieces here and there, sure. There may be some overvalued industries. ... But once you weigh in their actual sales and earnings growth, the (price-to-earnings) ratios actually don’t look that bad.”
What’s surprising about the Allianz survey, he and other market experts said, is that so many Americans believe the pace of stock growth is unsustainable.
“The concerning part is how many people seem to have this common economic sentiment,” said Jai Kedia, a research fellow at the Center for Monetary and Financial Alternatives at the libertarian Cato Institute.
The survey findings imply that potential investors might be selling stocks, or holding off on buying them, for fear prices might plunge.
If enough people behaved that way, a correction could become a “self-fulfilling prophecy,” Kedia said. “They will take their money out, which will end up causing a market correction.”
It's not just stocks: Consumers are uneasy about the economy
The survey reflects broader ennui among American consumers about the state of the economy.
Consumer confidence is running low. Americans are worried about rising prices, especially fuel prices. Nonetheless, stocks continue to rise.
Some degree of caution about the stock market is a good thing, said LaVigne of Allianz Life, because the market is volatile and corrections happen.
But the survey suggests potential investors are sitting on the sidelines, hoping to time the market. That strategy can backfire, LaVigne said, because you end up missing the good days as well as the bad.
“Over the long term, not investing in the market, you are going to lose,” he said.
This article originally appeared on USA TODAY: Is a stock market correction coming? Most Americans think so
