Six signals sound one clear warning for investors

Key market indicators are flashing warning signs and investors should brace for turbulence, warns Cormac Lucey

Timing global equity markets is not an easy task. But when several separate indicators signal caution, it may be time for alarm. 

This is currently the situation regarding US equity markets as President Donald Trump launches his much-anticipated tariff wars on America’s allies. 

Signal 1: US unemployment rate

In the past, when the unemployment rate in the US started to rise after many years of steady falls, it has signalled a shift in the economic cycle, often presaging recession. 
The US unemployment rate hit 4.1 percent in February, up considerably from its April 2023 low of 3.4 percent. 

According to BCA Research, the investment research company, there has never been a situation in which the three-month moving average unemployment rate has risen by more than a third of a percent—as is now the case—without a recession following.

Signal 2: The US yield curve

The yield curve depicts the differing interest rates that apply to government debt of varying maturities. 

When shorter-term debt yields higher returns than longer-term debt, it is usually the result of central banks raising short-term interest rates too high. 

Recession generally follows shortly after the normal state of affairs, where longer-term interest rates exceed short-term rate returns. This normal state of affairs returned last December. 

Signal 3: US price/earnings ratio 

Right now, the Standard and Poor’s (S&P) forward price/earnings ratio (which compares today’s price to predicted—or forward—earnings) comfortably exceeds 20. That is one of the highest S&P ratios observed in a half-century. 

In the past, higher prices have tended to anticipate lower investor returns.

Signal 4: US cyclically adjusted price-to-earnings ratio

A significant drawback of the conventional price/earnings ratio is that when we compare a highly inflated share price to cyclically inflated earnings, the situation can appear okay. 
The cyclically adjusted price-to-earnings (CAPE) ratio seeks to correct this defect by dividing equity prices by their average earnings over the previous decade. 

This way, the CAPE avoids the risk that cyclically elevated earnings may make cyclically elevated share prices look normal. 

The CAPE ratio currently stands at 36.34 times cyclically adjusted earnings. This puts current equity values among the highest ever recorded. 

If return patterns observed in the past are replicated, we might expect real equity returns (after inflation) to come in just slightly above zero over the next 15 years.

Signal 5: US price/book ratio 

The price/book ratio compares the market price of the equity market to the book value of the net assets on the balance sheets of those companies on the market. 

The US market’s price/book ratio is currently higher than it has ever been, even at the peak of the tech bubble in 2000.

When we examine our five bear market indicators, we can see that they are each signalling caution, suggesting extreme prudence regarding equity returns in the near future. 

This caution is only increasing in response to the trade tensions US President Donald Trump continues to unleash. 

Signal 6: US trade tariffs

I expect continued turbulence as Donal Trump continues to push the trade tariff agenda he unveiled to the world on 2 April. 

We might hope for signs of compromise to lead a relief rally, but the upshot in the first instance has been upheaval in the markets. 

While the tariffs may be the catalyst that has unleashed this upheaval, however, it is my view that they are not the ultimate cause of the recessionary/bear market conditions we are seeing emerge in the US. 

I don’t expect to see equity markets bottom out until some time later this year or early next.

Investor caution

Equity markets do not follow a neat pattern. They often overshoot in one direction only to then overshoot in another. Just because six key signals are all neatly pointing in one direction doesn’t mean equities will immediately fall in value.

In the medium term, however, it does suggest that future returns will be weak and that investors should be cautious.

Cormac Lucey is an economic commentator and lecturer at Chartered Accountants Ireland

*Disclaimer: The views expressed in this column published in the April/May 2025 issue of Accountancy Ireland are the author’s own. The views of contributors to Accountancy Ireland may differ from official Institute policies and do not reflect the views of Chartered Accountants Ireland, its Council, its committees or the editor.