The stock market could experience a correction as investors adjust to more moderate growth prospects and pressured valuations, WisdomTree and Wharton School economist Jeremy Siegel said Monday.
"Equity markets continue to grapple with higher discount rates, which compress valuations," Siegel wrote in his weekly column on WisdomTree's website.
"The S&P 500, trading at 23x forward earnings, reflects overly optimistic growth assumptions," he added. "Consensus earnings growth of 16% for 2025 is likely too high; an 8–9% increase is more realistic. Consequently, the market could see a correction as valuations adjust to higher rates and moderated growth expectations."
Investors already appear to be showing some concern.
Siegel noted the VIX volatility index surpassed 20 on Friday, "indicating elevated hedging activity and caution among investors. While far from the panic levels seen in bear markets, this reflects growing uncertainty. Historically, such caution is bullish for long-term equity returns as it signals fear being priced in."
Tech-sector growth stocks remain dominant, while high short-term interest rates are pressuring small caps, despite a resilient economy, according to Siegel.
"The economy is far from signaling recessionary weakness, but higher rates will weigh on equity valuations and create challenges for interest-rate-sensitive sectors like small caps. Investors should prepare for volatility and recognize the long-term opportunities from any market dips," he wrote.
"The bond market, too, deserves attention. With potential for further upward moves in long-term rates, fixed-income investors should remain cautious of adding to duration even with the higher rate spike."
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