VanEck senior portfolio manager Cameron McCormack has warned that US markets may be underestimating significant economic risks, even as equities reach record highs. McCormack suggests that market indicators and signals from the Federal Reserve point to a market environment that is currently “priced to perfection.” He noted that credit spreads are nearing levels not seen since before the Global Financial Crisis, and the VIX volatility index is hovering near historic lows.
McCormack highlighted the unusual dissent within the Fed during the July rates meeting, where two governors advocated for interest rate cuts rather than maintaining the current rate. Such a divergence in opinion hasn’t occurred in over three decades. According to McCormack, the minutes from the Federal Open Market Committee (FOMC) reveal concerns about inflationary pressures resulting from tariffs and a potentially weakening labour market.
“These risks are not yet fully priced in,” McCormack stated. “The biggest overlooked threat is stagflation—higher inflation paired with low economic growth. Early signs are emerging with rising core inflation, slower employment growth, higher ISM services prices paid, and lower ISM services activity.” McCormack drew parallels between the current market conditions and previous periods of inflated valuations, such as the dot-com bubble and the COVID-19 reopening trade of 2021, where low-quality companies were ultimately exposed.
McCormack advises investors to prepare for increased market volatility by focusing on quality companies. He suggests prioritising businesses that demonstrate high return on equity, stable earnings, and low financial leverage to navigate the potentially turbulent economic landscape. VanEck offers a range of investment solutions, including exchange-traded funds (ETFs), focusing on providing investors with access to diverse and innovative investment strategies.
