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

The virtual button with the letters AI in a circle hovering above a keyboard, about to be clicked by a cursor.
Tech Stocks

Emerging Canadian AI Companies With Big Potential

These tech stocks are paving the way to an AI-filled future, but still offer enough growth ahead for a strong…

Read more »

Young Boy with Jet Pack Dreams of Flying
Tech Stocks

Is Constellation Software Stock a Buy, Sell, or Hold for 2025?

CSU stock has long been a strong option for high growth, high value stocks. But are there now too many…

Read more »

hand stacks coins
Dividend Stocks

3 Ultra-High-Yield Dividend Stocks You Can Buy and Hold for a Decade

These three high-yield dividend stocks still have some work to do, but each are in steady areas that are only…

Read more »

Asset Management
Stocks for Beginners

TFSA: 4 Canadian Stocks to Buy and Hold Forever

Thinking about what to buy with the new TFSA contribution space in 2025? These four Canadian stocks are worth holding…

Read more »

concept of real estate evaluation
Stocks for Beginners

2 No-Brainer Real Estate Stocks to Buy Right Now for Less Than $1,000

These two real estate sector-focused stocks have the potential to deliver strong returns on your investments in the coming years.

Read more »

engineer at wind farm
Energy Stocks

Invest $20,000 in This Dividend Stock for $100 in Monthly Passive Income

This dividend stock has it all – a strong outlook, monthly income, and even more to consider buying today.

Read more »

stocks climbing green bull market
Stocks for Beginners

3 TSX Stocks Soaring Higher With No Signs of Slowing

Don't ignore stocks just because they look like they're at a high price. Instead, see exactly why they've driven so…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »