In

my most recent column

, I highlighted our firm’s perspective on how markets are at new highs and that is not necessarily a bad thing. Well, we were right, at least for two weeks, as markets have continued to march higher since that column was posted. 5i Research has, in the past, been accused of being “perpetually bullish” and we might agree with this a bit. After all, markets have steadily climbed higher for, oh, the past 100 years, and it has paid off for investors, so far, to be optimistic rather than pessimists. Still, in order to present a balanced picture, we present to you five reasons today to be worried about the market. Don’t shoot the messenger.

U.S. fiscal imbalances and government debt

We will start with the big one, as this is the one that would keep us up at night the most. There has been worry about government debt for decades, but the recent budget bill in the U.S. has taken this worry to peak levels. The U.S. federal budget deficit is now projected at US$1.9 trillion in 2025 (about six per cent of GDP), far above historic norms. Excessive government spending, without clear plans for reduction, could force higher

Treasury yields

, increase the cost of borrowing for the government and corporations and threaten confidence in U.S. financial markets. Higher fixed-income rates could see money flow from the market to savings accounts and GICs. Higher rates could lower corporate earnings. Yes, government spending can also provide a stimulus, but at some point, the piper needs to be paid. Countries cannot simply borrow trillions for all eternity.

Persistent high inflation

Remember the stock market in 2022? Was that fun? (Answer: No; the S&P 500 fell 18 per cent). Investors can’t stand inflation. When inflation surged in 2022, panic set in. U.S. inflation currently sits at 2.7 per cent, still remaining above the Federal Reserve’s two per cent target. This

higher inflation

has direct effects on interest rates, increases borrowing costs, pinches consumer spending and limits the Federal Reserve’s ability to lower rates (despite U.S. President

Donald Trump

’s wishes), all of which suppress market momentum and can lead to heightened market volatility. The market is in party mode now, but all it would take for a serious setback is four per cent inflation to scare off investors.

Rising geopolitical and trade tensions

Ongoing global conflicts (notably the Russia-Ukraine war), and fresh

U.S. tariff threats

and implementations — especially those targeting China, Mexico, our country and Russia — are deepening trade uncertainty. These actions risk triggering further inflation and retaliation from trade partners, undermining corporate profitability and global market stability. We have talked about this before, but it is the uncertainty that worries investors. Trump has made many conflicting announcements about tariffs on different countries. Investors have so far — after the April slump, at least — largely ignored the tariff wars, believing in TACO (Trump Always Chickens Out), the idea that Trump has a pattern of walking back his threats. But tariffs have a real, and negative, economic impact and investors may realize it later this year. Then the market party could end, or at minimum slow down.

Economic slowdown and recession risk

There are increasing signals of U.S. economic deceleration, including decreased job openings, drops in consumer confidence, a drag in business activity (especially in the services sector) and rising consumer debt levels in credit cards, auto loans, and mortgages. Mounting evidence suggests a potential recession in the third or fourth quarter of 2025, which would weigh heavily on stocks. Of course, economists have been

predicting a recession

for more than three years now and the actual resiliency of the economy has been impressive, helping support stock market gains. But recessions are part of a normal business cycle, and cannot be held off forever. At some point, for some reason, the economy is going to slow and perhaps move into negative territory, and this would certainly concern investors.

Uncertain Federal Reserve policy

The U.S.

Federal Reserve

is hesitant to cut rates due to persistent inflation. Ambiguity around central bank policy, especially in the context of unclear or sudden shifts in administration priorities, keeps investors on edge, increases market volatility and can dampen recovery prospects. Throw in the fact that Trump desperately wants to fire the Fed’s Chairman Jerome Powell and the uncertainty increases. Everybody wants lower interest rates but this can be a double-edged sword. Lowering rates prematurely could kick-start inflation again, set off even more asset bubbles and set us up for a financial crash down the road. Trump needs to re-think what he wishes for. Most investors would agree that the Fed has done an excellent job, stopping inflation in its tracks in late 2022 and guiding the economy through the COVID pandemic successfully. A change in Fed tactics seems wrong to us when things have been working so well, and markets likely would not like a dramatic shift much at all.

Peter Hodson, CFA, is founder of 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned.)

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