Investing.com -- Deutsche Bank (ETR:DBKGn) analysts identified three risks that could disrupt the ongoing market rally, which has seen robust gains throughout 2024.
While markets appear resilient, the note warns that elevated valuations and persistent vulnerabilities could lead to significant selloffs if these risks materialize.
Economic Downturn: An economic slowdown poses the most significant threat to risk assets, according to the bank.
The Deutsche Bank analysts pointed to the summer of 2024 when a weaker-than-expected U.S. jobs report triggered an 8.5% drop in the S&P 500 and widened U.S. high-yield spreads by 84 basis points.
"The fact we had a sizeable selloff, even though the data wasn't pointing to a recession, begs the question as to how severe it could have been if the data did start to point towards a recession and show an outright contraction," they wrote.
Heading into 2025, the bar for growth surprises is said to be higher, with consensus forecasts for U.S. GDP at 2% or more.
"For 2025, the consensus forecast is already above 2% for the U.S. So getting an upside surprise should be more difficult now, precisely because growth has beaten expectations over 2023 and 2024."
Geopolitical Tensions: Geopolitical conflicts could also shake market confidence, said the bank. A selloff in April 2024 following heightened tensions in the Middle East saw the S&P 500 fall 5.5% and Brent crude spike above $92 per barrel.
More recently, concerns over escalation between Russia and Ukraine caused a sharp risk-off reaction. Deutsche Bank notes, "Markets are clearly very jittery to any geopolitical escalation... if a fresh conflict or a major escalation did happen, then we know from recent experience that markets can react very negatively."
Inflation: Finally, an inflation resurgence could disrupt markets. Deutsche Bank notes that persistent inflation earlier in 2024 pushed rate hike expectations higher and briefly sent Treasury yields above 5%.
While inflation has eased, it remains above target. Deutsche Bank warns that inflation could remain above 2% through 2026, making it "an increasing risk as we head into 2025."
The analysts conclude that while markets have weathered these risks so far, any one of them could upend the current rally.