As I write this note, the MSCI World Stock Market Index is down 3% from its all-time highs. For some reason, that has caused panic among investors.
Year-to-date, the global stock market is up 1.6%. So, this week, we’d like to address the current state of fear and discuss whether it is justified.
First we want to remind everyone that stock markets oscillate over time and it is very common for them to pull back from recent high levels.
Declines in stock prices up to 10% happen every year on average over the last hundred years. We haven’t had a 10% correction in the MSCI World Stock Index since October 2023. So even if this recent decline continues on to a correction, it might not be the end of the world.
So why the sudden burst of fear among the investor set?
Well we can think of two key data sets that might be the root cause of the surge in panic. One is the recent downward revision of 2025 earnings estimates, and two, the recent collapse in the Fed’s forecasted GDP growth rate for Q1.
This year, analysts have dropped their earnings forecasts for publicly traded companies by 6-12%. That may be spooking investors given how elevated stocks are trading on a multiple of forward earnings estimates. Makes sense that if forward earnings estimates are dropping then stock prices should follow suit.
However, this happens every single year. Forward earnings are always reduced at the beginning of the year. It’s a little game that Wall Street plays to make sure companies beat their earnings estimates.
This week the Fed’s GDP Now Forecast dropped from 2.5% growth to a 1.5% decline for 2025 Q1 GDP growth. Major Wall Street economists’ forecast are still around 2%.
This might be another cause of the panic, but this Fed tool has a very poor track record and is including several severe assumptions based on the Trump tariff programs. If you haven’t noticed the Fed hates the Trump policies.
Either way we prefer to look at another market to sense check investor fear in the stock market—the Credit Markets.
The credit markets include publicly traded bonds, loans and other debts that have the potential to default when things get bad.
High Yield Bond (Junk Bonds) spreads remain at extremely low levels. Today that spread (the extra yield investors receive over Treasuries for the potential of default) is just 2.8%. Historically, HY Bond spreads are 5%. In mid 2022, when the stock market declined by 20%, HY Bond spreads were nearly 6%. So for now, credit markets aren’t confirming the panic.
Given how long its been since we had a stock market correction, we wouldn’t be surprised if the selling continues for a bit longer. However, for now, this seems to be a normal pullback.
