4 Wall Street experts weigh in on what makes the stock market's rally so fragile

Mike Segar/Reuters

• The stock market's rally from March lows overcame dismal economic reports, corporate profit warnings, and economist caution.
• As stock market investors pocket sizable gains, experts warn the uptrend is fragile and facing significant threats.
• "Gravity is taking over" as markets begin to assess reopening risks and a second wave of virus cases, said Marc Odo, client portfolio manager at Swan Global Investments.
• Recession aftershocks could arrive later in the year as businesses fail to stage healthy rebounds, other experts warn.
• Some strategists even point to indexes' heavy weighting of mega-cap tech stocks, cautioning that such crowding can drive as strong a downtrend as a rally.
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Bleak economic reports in recent weeks have been largely ignored by an unrelenting market rally.

The S&P 500 is up 28% from its late-March low, while the Dow Jones industrial average has climbed 27%. Just last week, the Nasdaq composite erased its year-to-date losses and now is less than 6% from record highs.

But as stock investors mint fresh gains, a growing number of experts warn the run-up isn't made to last.

One element they cite is overstretched valuations. By one measure, equities are historically expensive relative to profit forecasts. The S&P 500's price-earnings ratio rose to 20.4 times on Tuesday, the highest since 2002.

There are other troubling aspects surrounding the underlying economic environment. The unemployment rate soared to 14.7% in April as the coronavirus pandemic's fallout intensified. Corporate earnings forecasts are their gloomiest since the financial crisis. Federal Reserve chair Jerome Powell, who typically strays from exaggeration, recently classified the current recession as "without modern precedent."

That has experts questioning the strength of the stock market's recent rally, and wondering if such profits are under threat. Business Insider spoke to several experts to get their views, and the consensus was clear: recent market gains are vulnerable.

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