High valuations are currently dominating the market, leaving it vulnerable to a potential correction. According to Brian Arcese, portfolio manager at Singapore-based Foord Asset Management, two significant catalysts could trigger this downturn. With the S&P 500 up approximately 23% year-to-date and boasting a price-to-earnings ratio above 27—considered expensive by many metrics—the market’s high price is a major concern. Arcese highlighted slowing economic growth and a potential resurgence of inflation as key factors that could cause a market correction. While he stressed that a correction would be beneficial for long-term market health, he also identified opportunities in the utilities sector as investors brace for such a scenario.
Key Takeaways: Market Correction on the Horizon?
- High valuations in the current market increase the likelihood of a correction.
- Two potential catalysts could trigger a market correction: slowing economic growth and a resurfacing of inflation.
- The utilities sector presents an attractive investment opportunity despite the overall market uncertainty.
- Slower-than-expected earnings growth, particularly when coupled with high expectations, could also act as a catalyst for a correction.
- Foord Asset Management, for example, sees value in the utilities sector, specifically naming **SSE** and **Edison** as holdings exhibiting resilience amidst market volatility.
A ‘Catalyst for Correction’
Arcese emphasizes that while the market has seen significant growth, a correction would be a healthy adjustment. He identifies two primary “catalysts” that could trigger this correction:
Slowing Economic Growth
Arcese points to the slowing pace of U.S. economic growth as a primary concern. While growth remains “quite healthy,” its deceleration could act as a catalyst for a market pullback. The U.S. GDP grew less than expected in the third quarter of 2024, a trend that, if it continues, could unsettle investor confidence.
Resurgence of Inflation
Another potential trigger for a correction is a resurgence in inflation. While October’s inflation figures came in at 2.6%, meeting expectations, Arcese notes that any further uptick in inflation could drastically alter the market sentiment and initiate a sell-off. The Federal Reserve’s response to rising inflation would also play a vital role in shaping the market’s reaction.
Disappointing Earnings Growth
Arcese further highlights the potential for a correction originating from slower-than-anticipated corporate earnings growth. Even excluding the high growth rates seen in the IT and communication services sectors, the expected earnings growth of 10-12% for 2025 (as predicted by Goldman Sachs) is considerably high compared to historical trends. The high valuation of the market, combined with these elevated expectations, increases the sensitivity of the market to any disappointment in earnings reports. “If you have high expectations coupled with high valuations, then if you do see that earnings growth start to slow, or expectations start to roll off, that could be a catalyst for correction,” Arcese stated.
The current market conditions—a combination of U.S. GDP growth, rising inflation, interest rate decisions, and earning expectations—are fairly uncommon, according to Arcese. These factors typically do not align simultaneously but, when they do, it creates a positive environment for equities, as the current market demonstrates. However, he maintains that a correction is a natural and even beneficial development.
Opportunity in Utilities
Despite the overall market uncertainty, Arcese identifies a potentially lucrative investment opportunity in the utilities sector. He argues that this sector’s growth prospects are currently not fully reflected in its valuation. While utilities stocks are relatively more expensive compared to their past performance, they still remain less expensive than the broader market.
Arcese cites the surging demand for electricity driven by the expansion of data centers and the growth of artificial intelligence (AI) as evidence of the sector’s renewed growth trajectory. This increasing electricity demand is creating renewed prospects within the sector; increased growth is therefore on its way.
Beyond the increased demand, regulated utilities are also required to invest heavily in upgrading the transmission and distribution grids. These investments are regulated by the authorities to generate a return for shareholders. This blend of organic growth and regulated returns makes the utilities sector a relatively stable investment avenue, even in the face of market volatility. Arcese highlighted **SSE** and **Edison** as examples of companies in the utilities sector that Foord Asset Management finds particularly attractive.
In conclusion, while a market correction is considered likely given the current high valuations, the underlying economic factors and potential catalysts are carefully reviewed, and the utilities sector is highlighted as a safe haven for investors navigating this uncertainty. The interplay of economic indicators and market expectations will continue to shape the market’s trajectory in the coming months.
