3 Reasons Why Stocks Could Continue to Fall

There are three factors that tend to go unnoticed in a market used to mechanically buying the dip. Elements that remain silent—until they suddenly become loud, generating that familiar uneasiness that emerges when something doesn’t quite add up. What if, this time, the market is truly too uncertain to follow its usual pattern?

1) The AI bubble isn’t what you think

There is a clear perceptual distortion. Many believe the “AI bubble” narrative has been defused by NVIDIA’s latest results, with revenue and earnings both rising more than 60% YoY. But the often-overlooked technical point is that these numbers are not driven by broad-based macro demand. They are the result of a closed CAPEX loop.

The revenue stream is fueled by record capital expenditures from Big Tech companies investing heavily in GPUs, data centers, and AI infrastructure. A self-reinforcing cycle: Big Tech spends, NVIDIA books the revenue, and the market relaxes. But this mechanism has two vulnerabilities.

The first is inevitable saturation: what happens when this CAPEX cycle slows and management teams begin demanding tangible returns rather than continuous expansion? Such elevated CAPEX cannot persist indefinitely; historically it never has. And whenever it decelerates, the internal revenue circuit weakens.

The second vulnerability is even more subtle: the semiconductor industry is highly cyclical. Despite the current enthusiasm, it behaves like any sector with substantial macro sensitivity. A simple demand rotation or inventory rebalancing can rapidly deflate the narrative. And if revenue growth depends more on CAPEX than on end-market demand, repricing becomes inevitable.

Then comes a question few want to confront: does it make sense to imagine Big Tech evolving into CAPEX-heavy companies, similar to energy or industrial giants? Historically, CAPEX-intensive sectors tend to underperform the S&P 500 over the long run. The market has largely ignored this, but the point remains structurally relevant.

2) The real issue is the Fed, not earnings

The second warning sign concerns monetary policy. Markets obsess over rate-cut expectations and treat the FedWatch Tool as if it were an infallible indicator. Yet the probability of cuts continues to shift because of a fear few openly acknowledge: inflation stabilizing above 3% may prove more persistent than anticipated.

Trump’s proposed economic agenda risks generating additional inflationary pressure through tariffs, reshoring incentives, and pro-growth fiscal stimulus—all of which can push prices higher. At the same time, rising automation introduces an ambiguous labor-market dynamic: unemployment could fall for the “wrong” reasons—not due to economic strength, but due to technological replacement.

Here a technical point becomes important: the divergence between the Leading Economic Index (LEI) and the Coincident Economic Index (CEI). Historically, when the LEI declines while the CEI holds steady, the likelihood of a future downturn increases. It’s a pattern reminiscent of the 1970s.

What if the Fed faces a slowing economy, a tight labor market, and inflation that refuses to fall? One word: stagflation. A scenario markets are not fully pricing in, as it implies stickier bond yields and compressed equity multiples.

3) Fragile sentiment and illiquid markets

The third—and perhaps most underestimated—factor: sentiment.
The CNN Fear & Greed Index has entered full extreme fear territory. In the past, this wasn’t a major issue because abundant liquidity allowed the market to absorb shocks. Today, however, flows in the E-mini S&P 500 futures, based on CME data, show declining incoming liquidity. A liquid market cushions shocks; an illiquid market amplifies them.

Another often-ignored signal: the rise in the SOFR rate, a proxy for stress in the interbank funding market. When the cost of overnight financing rises, perceived institutional risk also climbs—an early indicator of systemic tension.

Overlaying all this is another fragile element: valuations. The index’s P/E ratio remains well above its historical average. In a context of potential macro shocks, elevated multiples provide little buffer to absorb negative surprises.

And so the combination becomes potentially explosive: fragile sentiment, thinner liquidity, and stretched valuations. These conditions form the ideal setup for even mildly negative news to trigger outsized market moves.

So?

These are not signs of imminent doom, but they are warning signals—the same ones markets have chosen to ignore until now. We need context, clarity, and the ability to accept that assets will not all behave the same way. Some will struggle; others may surprise. And every downturn could become—could—an opportunity, should these three risk factors prove overstated.
The important thing is to take nothing for granted, not even buying the dip.

Original article published on Money.it Italy 2025-11-28 06:54:00. Original title: 3 motivi per cui le borse potrebbero continuare a scendere