As the financial landscape of the United States continues to shift, the sentiment surrounding the stock market is increasingly cautiousMark Zandi, Chief Economist at Moody's Analytics, has issued a stark warning about potential risks that could significantly impact the stock market in the near futureDespite rampant optimism from Wall Street analysts who forecast a robust year ahead for the U.Sequities, Zandi’s perspective sheds a light on the underlying vulnerabilities that market participants need to be aware of.

Zandi posits that the current high asset prices may be unsustainable and points to the looming risks that could lead to a major correction in the stock market“Asset prices have overshot their natural values,” he stated in a recent interviewHe elaborated by mentioning various assets, including stocks, cryptocurrencies, housing, and gold, all of which are trading at historically high valuations

This raises critical questions about whether such valuations can hold in an uncertain economic climate.

His concerns stem from persistent high asset prices and an inflationary environment that seems to fuel itselfWith everyday market movements and corporate credit spreads, Zandi believes the potential for a market downturn becomes more pronounced“Every day that stock prices continue to surge or that the corporate bond market tightens, I grow increasingly worried about a correction,” Zandi added, noting that such a shift would have substantial ramifications for the broader economy.

Among the uncertainties the market faces, Zandi highlights two major policy proposals that could severely drag down the market: the increase of tariffs on imported goods and the large-scale deportation of immigrantsBoth policies could lead to inflationary pressures that undermine consumer confidence and spending, key indicators of economic health.

Firstly, the proposal to impose hefty tariffs on a wide range of products imported from countries such as China, Mexico, Canada, and other BRICS nations has surfaced as a significant concern

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Economists argue that these tariffs would likely be passed on to consumers, resulting in higher prices for goodsThis potential increase in the cost of living could stoke inflation and eventually lead to escalated interest rates, squeezing consumers even further and hampering economic growth.

While proponents of the tariffs might argue that they would protect domestic industries, Zandi warns that the impacts could be far-reachingHe stated, “I’m not in favor of broad tariffsIf we were to impose limited tariffs, it might not be catastrophic, but a broad application would be a significant issue.” The difference in potential impacts is stark, as broad tariffs could induce widespread price increases, igniting inflationary fears and altering consumer spending behavior.

Besides tariffs, Zandi also connects the dots with the aggressive plans for mass deportations of millions of immigrants

Drawing on research from the Center for Immigration Studies, if the pledges to expel a substantial number of immigrants are enacted thoroughly, nearly 12 million individuals currently residing in the U.Scould be forced to leaveThe ramifications of such a move would cause significant disruptions across various sectors and potentially lead to labor shortages in vital industries such as construction and agriculture.

Economists have speculated on how such a large-scale deportation could unfold and its multifaceted impacts on the labor marketFor instance, construction workers, who often comprise a significant percentage of the undocumented workforce, might lead to project delays and cost escalations in that sector"If we see 50,000 undocumented immigrants being deported, it might not be a big dealBut if it’s 500,000, that’s a major event, and it could lead to a multitude of challenges," Zandi asserted, highlighting the potential chaos that mass deportations could cause.

The resulting labor crunch might necessitate that employers offer higher wages to attract talent, in turn increasing inflationary pressures on the economy

Zandi emphasized, “The U.S., much like Canada, heavily relies on immigrant laborIf we begin mandating departures from the country, the labor market will become increasingly tight, accelerating wage growth and consequently intensifying inflationary pressures.”

In light of these warnings, despite the rising risks of a stock market downturn, Zandi maintains an overarching expectation for the markets to remain relatively stable, specifically hinting at a “sideways trading” pattern for stocks over the next few yearsHe forecasts that corporate earnings growth may hover around the 4 to 6 percent mark, suggesting that while volatilities could ebb and flow, the long-term picture may not be as dire as some anticipate.

Furthermore, consensus on Wall Street suggests a more tempered return rate in the upcoming years, with firms like Goldman Sachs and Bank of America predicting nearly a 10 percent rise in stock prices by next year