2 Threats to the Market Rally to Keep a Close Eye On

There are two threats that could possibly trigger another selloff, so be sure to watch for them in the near term, and perhaps invest here instead.

| More on:
Caution, careful

Image source: Getty Images

The market continues to climb, with perhaps just a few wobbles here and there. Yet there are some threats to a continued market rally. So, if you’re worried that these all-time highs are too good to be true, here are two threats that could mean you’re right.

Big Tech

Earnings continue to pour in from Big Tech companies in the United States, and they’ve been pretty even with good and bad news. The Magnificent Seven had a clear mix of some companies seeing earnings fall below estimates while others surged past them.

Meta (NASDAQ:META), in particular, saw stellar earnings reports that led to an even higher share price. Yet analysts warn that should next earnings see earnings come in lower than originally hoped, this could trigger a market selloff. Specifically, NVIDIA (NASDAQ:NVDA) reports on Feb. 21, so here’s hoping the company sees even more strong results in the near future.

Unfortunately, Big Tech and the Magnificent Seven take about 20% of the overall S&P 500 market share. So, when you’re seeing the S&P 500 climb higher and higher year to date, that’s really the Magnificent Seven leading the charge.

Therefore, should these companies see a drop, that could trigger a drop in the Index at large. And should that happen, this could trigger a major market selloff across not just the United States but in Canada and even the world. So, keep an eye on these earnings if you want to protect your portfolio.

Inflation

Another more obvious point to continue to watch is inflation. While everyone continues to be narrowly focused on interest rates coming down, that’s simply not going to happen if inflation continues to climb. Inflation rose higher in Canada in December, so hopefully, that comes back down come January numbers

The thing is, it’s been made clear both in Canada and the United States that until we reach that 2% inflation rate, it’s unlikely that interest rates will come down. No matter how much analysts and economists state that we could see an earlier rate cut, that’s simply not going to happen until that 2% is reached.

What’s more, Canada tends to follow the U.S. when it comes to rate cuts and other major financial decisions. That’s mainly because our economies are so connected. Again, not only do we need to see inflation get to 2% in Canada, but perhaps even the U.S. as well before interest rates come down.

If inflation continues to climb, this could trigger yet another drop in the stock market — especially if, in the meantime, we continue to see interest rates remain at 5%.

Bottom line

If you’re looking to protect yourself during this time, then I actually wouldn’t suggest an S&P 500 exchange-traded fund (ETF). Instead, perhaps consider something more like iShares Core Balanced ETF Portfolio (TSX:XBAL). This ETF is just as it sounds: balanced. That balance is between bonds and equities, aiming for that 60/40 split.

What’s more, the ETF has done well compared to the Index. Shares are up about 13% in the last year as of writing and 8% in the last three months alone. All from investing in a balanced mix of assets across a wide range of industries. And, of course, it invests in corporate and government bonds.

So, if you’re worried about the future and a potential drop in the markets, this is certainly an area to place your cash — all while also receiving a dividend yield of 2.44% as of writing.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Meta Platforms and Nvidia. The Motley Fool has a disclosure policy.

More on Stocks for Beginners

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

Buy 32 Shares in This Glorious Dividend Stock and Create $1,074.88 in Passive Income

This dividend stock is also a growth stock you're going to want on your side over the next year and…

Read more »

Mature financial advisor showing report to young couple for their investment
Energy Stocks

New Study Shows 36% of Couples Hide Spending From Partner, And It’s a Pressure Point

Having the hard talk? It can literally pay to do so. Here's how to stop holding out on your partner…

Read more »

Stocks for Beginners

Value Investors: Are You Buying and Holding Forever? Think Again

Value stocks are great, but if you don't have a goal in mind that stock can quickly turn from value…

Read more »

young woman celebrating a victory while working with mobile phone in the office
Stocks for Beginners

2 Stocks Under $50 New Investors Can Buy Confidently

Are you new investor looking to start small before buying stocks trading in hundreds and thousands? You could consider these…

Read more »

Male IT Specialist Holds Laptop and Discusses Work with Female Server Technician. They're Standing in Data Center, Rack Server Cabinet with Cloud Server Icon and Visualization
Tech Stocks

3 Undervalued Software Stocks Set to Jump in 2024

These software stocks are overdue for a recovery, and that should certainly happen as they move back to profit in…

Read more »

Two hands holding champagne glasses toasting each other with Paris in the background
Dividend Stocks

Planning a Wedding? Here’s How to Actually Make Money on the Big Day

Inflation, interest rates, it all adds up when planning a wedding. So how can you ask for cash, keep costs…

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Stocks for Beginners

This Phenomenal Canadian Growth Stock Jumped 9% and Still Has More Upside

This Canadian stock surged after beating earning estimates, but there is even more room to run for this stock climbing…

Read more »

Dice engraved with the words buy and sell
Tech Stocks

Nvidia Stock Is Heading for US$800: Is It a Buy?

Nvidia stock (NASDAQ:NVDA) could be heading to US$800 per share, but with shares already climbing steadily, is a drop coming…

Read more »