ATFX - The dark clouds have not yet dissipated! Analysts warn that these major risks may shake US stocks!

While still bullish on U.S. stocks, analysts warn that there are still many risks that could shake the stock market over the next 12 months, such as these four hard-to-ignore factors...

The S & P 500 has surged 19% so far this year after a bad 2022.But there are still many risks that could shake the stock market over the next 12 months.

That's the view of Nicholas Colas, co-founder of DataTrek Research, who in a report on Wednesday highlighted several scenarios that could undercut the strong rally in U.S. stocks this year. Colas said:

atfx- "While we remain optimistic about the outlook for U.S. stocks, it's always worth considering the other side of the trade, with the S & P 500's current forward price-to-earnings ratio of 20.3 times implying near-perfect stock prices. If earnings expectations were to rise as they did in 2020 and 2021, that valuation would be acceptable, but it's not. In fact, just last week, Wall Street's earnings forecast for 2024 hit a record low. The world is always imperfect and unpredictable, and stocks are priced almost perfectly."

ATFX - Here are Colas' top four risks for U.S. stocks in the second half of the year, along with some hedging recommendations.

1. Investors start taking profits

There may be times when the market hasn't "gone wrong," Colas said, but the S & P 500 will remain flat or down a few percentage points for the rest of the year, possibly as investors take profits: sell technology stocks and move into underperforming stocks such as financials or industrials.

Since large technology stocks make up about a third of the S & P 500 index, a 10 per cent fall in tech stocks as a whole could trigger a 5 per cent decline in US stocks. To hedge his risk, heInvestors are advised to hold financial or industrial stocks in order to benefit from potential rotations.

2. Sticky inflation

Colas believes that if inflation proves more stubborn than expected, it will force the Federal Reserve to resume the pace of interest rate hikes, even if it risks pushing the US economy into recession.

This will shock investors, who now expect the Fed to raise interest rates only once more, and the end result will be a soft landing. But Colas said,This sticky inflation could be driven by a rebound in oil prices and higher housing prices.To hedge against risk, Colas advises investors to own energy stocks.

3. An unexpected slowdown in the job market

Colas warned that the US labour market and economic growth could unexpectedly decline due to the long-term variable lag effects of monetary policy. The Fed has raised interest rates by more than 500 basis points over the past year and these lags could start to show up in the economy. He said:

"If a few months of below-average job growth and consumer demand data is available, it could be enough to convince managers that a recession is imminent. That would prompt them to accelerate layoffs, triggering a downward spiral."

In this case, Colas believes that a potential hedge is to hold U.S. Treasury bonds.

4. Real interest rates continue to rise

Colas believes that as the Federal Reserve shrinks its balance sheet,Real interest rates should continue to riseHe said that so far,Higher real interest rates have not hurt stock valuationsBut that could change if real interest rates reach levels that convince investors that bonds will outperform stocks. Moreover, higher real interest rates could push up the value of the dollar, putting pressure on corporate profits.

In this regard, Colas recommends that investors can hedge this risk by selling stocks on highs and avoid the long-term risks of fixed income products. Colas concluded:

"None of these scenarios are our base case, but as we said at the beginning of the discussion, they remain important topics, and our assessment does not include'unknown 'shocks associated with adverse geopolitical events, but there is always the potential for these shocks to lurk in the shadows."