These five risks could push stocks lower, Wolfe Research says

Investing.com - A series of risks could spark a downturn in a stock market currently marked by elevated valuations and growing "speculative activity," according to analysts at Wolfe Research.

The benchmark S&P 500 has spiked by more than 13% so far in 2025, driven in large part by enthusiasm around plans from tech industry giants for massive expenditures on artificial intelligence.

But this year’s sharp gains and increased speculation, especially among retail traders, have given way to "signs of frothiness" in stocks, the Wolfe analysts argued in a note.

"[C]ertain factors are also stretched which leaves the market vulnerable to any whiff of bad news," they added.

One of these disappointments may stem from the soaring levels of AI spending, the analysts said. Many companies, particularly AI-focused hyperscalers, have put forward sky-high spending proposals in an attempt to harness -- and ultimately monetize -- the nascent technology.

But, given the lofty expectations created by these capital expenditures, underwhelming earnings forecasts represent the "largest potential risk to derail markets," the analysts said.

"Though we don’t see imminent risk this [earnings] season, disappointments in spending among the hyperscalers would change market sentiment, especially given their large concentration as well as the recent boost to GDP from this capex," they wrote.

Another headwind for markets could come from a sharp slowing in the U.S. labor market, which may fuel concerns the Federal Reserve has moved too late to cut interest rates, the analysts said. Last month, the Fed slashed borrowing costs by a quarter of a percentage point in a bid to support the jobs picture and signaled that more reductions may coming later this year.

While there has been a dearth of economic data during a prolonged U.S. government shutdown, further sluggishness in employment "would signal a weakening growth outlook," the analysts said. This could in turn underpin a narrative that any aggressive Fed rate cuts are "behind the curve" -- a scenario the analysts view as "bearish for stocks."

A jump in yields, powered by fresh fiscal stimulus and a pick-up in growth expectations in 2026, are another "key risk" for a sustained fall in stocks, they said. Yields tend to move inversely to prices.

More downside catalysts for the market and broader economy may come from signs of rising corporate credit stress as well, which have come to the fore recently following the collapses of U.S. auto parts supplier First Brands and car dealership Tricolor, the analysts said.

Fading momentum in corporate earnings was cited as another major factor that could impact equities, although the Wolfe analysts said they expect results during the ongoing third-quarter reporting period to be "strong."

"[A] key risk we’re watching is whether companies can continue their positive momentum of earnings beats," the analysts wrote. "Our sense is fundamentals, especially for large Tech companies, have played a key role in driving the market higher over the course of the year, so disappointments relative to expectations would likely sink this strong rally."