Our stock market forecasts are based on what “usually” happens in a given set of economic circumstances. The primary economic concerns now are rising levels of inflation and a very high, sustained federal budget deficit. The usual government response is to tighten spending, while the Federal Reserve usually tightens the money supply and increases interest rates. These efforts aim to cool the economy, often causing short-term stock market pain. Anticipating those “usual” responses is why our SPAIv4 6-month forecasts are somewhat negative for the Russell 1000, Dow 30, and the S&P 500—and severely negative for the Nasdaq 100, with potential drops of up to -20%.

The Unconventional Administration However, the current Administration is far from usual. They view cooling the economy as a political liability and are doing everything they can to stimulate growth. While the Administration makes headlines regarding tariffs and cutting “waste, fraud, and abuse,” federal spending has actually increased, causing the federal deficit to surge. Simultaneously, the Administration has used significant pressure to push the Fed to lower interest rates and expand the money supply. It remains to be seen which direction the new Chairman of the Federal Reserve will ultimately take.

Inflationary Headwinds Inflation is a growing concern. The current 4.3% Consumer Price Index (CPI) is troubling, but an even greater concern for our forecasts is the 11% increase in the Producer Price Index (PPI) since January. Higher prices stemming from oil, tariffs, and general uncertainty pressure both the economy and stock prices. Furthermore, the U.S. federal budget deficit currently sits at roughly 5.8%.

The Oil Factor The impact of high oil prices on inflation is unlikely to dissipate quickly. While oil prices have dropped from the height of the Iran crisis—falling from $118 per barrel to around $77—they remain nearly 30% higher than pre-crisis levels ($60/barrel). Our forecasting models react negatively to these levels. Moreover, the need to replenish drawn-down oil reserves will likely keep upward pressure on prices for several months.

The AI Stimulus Notably, our current models do not fully account for AI infrastructure spending and AI-related productivity gains. (We are working to adjust.) The surge in data center construction, increased electrical production, and widespread business implementation of AI likely represents a $1 trillion annual stimulus, which appears poised to continue for several years. While AI implementation increases short-term corporate spending, the long-term impact on job markets and productivity remains largely unknown.

Conclusion Given the likelihood of continued government stimulus and the massive, ongoing AI build-out, our negative forecasts may be overly pessimistic. These factors make a significant stock market correction appear less likely—at least for now.

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