It’s certainly been a painful month for stock market investors. The major benchmarks have retreated sharply, with the S&P 500 slumping about 10% from its highs in February.
Stock market corrections like this aren’t rare, but they don’t happen all that often, either. According to Capital Group, a money manager with assets under management exceeding $2 trillion, the S&P declines by over 10% about once every 18 months.
What happens next is anything but certain. Stocks are getting oversold on many sentiment measures, including CNN’s Fear/Greed Index, which is currently registering “extreme fear.” However, stocks don’t usually go up in a straight line when those signals sound. Instead, they pop and drop until a successful retest builds enough of a foundation for sustainable gains.
The stock market’s recent troubles have captured the attention of the world’s biggest investors, including Blackrock CEO Larry Fink, who recently offered up thoughts on recent selling.
Since Blackrock is the world’s biggest asset manager with $11.2 trillion in assets under management, paying attention to his words is probably wise.
Larry Fink, chief executive officer of BlackRock Inc., offered up a stark warning on stocks.
The stock market takes a tumble
The S&P 500 delivered impressive returns over the past two years, notching back-to-back returns of over 20%, including a 24% gain in 2024.
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The rally in stock prices has outpaced earnings growth, driving the price-to-earnings ratio, a key valuation measure, to lofty levels. Leading up to the recent stock market sell-off, the S&P 500’s forward one-year P/E ratio exceeded 22, far about its 10-year average P/E nearer 18.
Investors’ willingness to pay more for each dollar of earnings was built on optimism over surging spending on artificial intelligence, which catapulted technology stocks, and a friendly Fed.
In 2024, capital expenditures at the biggest cloud network service providers, or hyperscalers, skyrocketed. Amazon’s AWS, Microsoft’s Azure, and Alphabet’s Google Cloud spent $191 billion last year, up from $117 billion in 2023.
Much of that increase in spending went toward refreshing network infrastructure with high-performance servers powered by next-generation semiconductors best suited to handle AI workloads. The prospect of that spending creating new profit opportunities was the main reason behind the surge in tech stocks last year.
Stocks also trended higher, more broadly, thanks to hopes of a friendlier Fed. The Federal Reserve’s hawkish monetary policy to crimp inflation in 2022 had slowed economic activity, however, inflation progress was widely expected to result in a pivot to interest rate cuts that make it cheaper for companies to expand, and boost profits.
The Fed cut rates by 1%, including reductions in September, November, and December.
Unfortunately, cracks have formed in the bullishness on both tailwinds, and investors have taken note.
Inflation has become volatile, rising from 2.4% in September to 2.8% in February. Meanwhile, investors have become more concerned that this year will mark a peak in AI spending growth as capacity buildouts ramp.
Blackrock’s Larry Fink has candid words on the stock market drop
Fink’s role at Blackrock means he’s tied into the markets and big business. Blackrock’s massive size gives him access to the C-suite and countless analysts and data crunchers.
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What Fink says he’s seeing now might not be good for stocks short-term.
He says President Donald Trump’s decision to place 25% tariffs on imports from key trading partners—25% on Mexico and Canada, 20% on China, plus 25% on steel and aluminum imports worldwide—has business leaders ratcheting back.
“Every CEO I talk to, we’re starting to talk about a more fearful economy right now,” said Fink in an interview with Semafor.
The bad news is that it could mean economic slowing and short-term pain for stocks.
“Having [the market] fall 7% after the dramatic rise for the last 30 years is a blip,” said Fink. “The question is, is it going to fall another 8%? That’s a possibility.”
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A possibility of another 8% drop isn’t something investors will likely want to hear. The good news? Fink doesn’t think the damage will be long-lasting.
“I do believe this is going to be more short term, once we understand the policies, once we become more accustomed to it,” said Fink.
Fink echoed that thinking in a separate interview on CNN.
“There’s nothing wrong with a market pullback,” Fink said. “I look at that as a buying opportunity because I’m very bullish on America.”
Related: Veteran fund manager who correctly forecast S&P 500 crash updates outlook
