The 2017 global stock market rally is showing signs of fatigue and a 10 percent correction in U.S. equities looks imminent, experts are predicting.
Conflict in the Korean Peninsula or a Middle East oil crisis are emerging as the main low-probability but potentially high-impact market events. A central bank policy error or the failure of President Donald Trump's tax plan are likelier catalysts that may break what Bank of America Merrill Lynch calls the "Icarus melt-up" in global equities led by U.S. stocks.
Though down for the second week in a row last week, the MSCI All Country World Index is on track for a record 13 months of unbroken gains. The S&P 500 and the Dow Jones industrial average notched up their seventh successive monthly win in October while the Nasdaq recorded its fourth straight monthly gain.
Many feel something has got to give.
"Icarus is flying ever closer to the sun," said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, likening the seemingly inexorable rise in global stocks to the figure of Greek myth who tumbled from the sky after the sun melted the wax in his artificial wings.
Signs of potential trouble include U.S. equities valuations being stretched while margin debt — money borrowed by U.S. investors to fund share purchases — stand at record levels. Meanwhile, low volatility, the absence of sharp market moves, points to complacency about potential shocks that may upset the final stages of the bull market.