Editor's note: This post originally appeared on Business Insider.
Financial markets are on edge Friday morning after yesterday's bloodbath in momentum stocks.
On Thursday the Nasdaq suffered its worst one-day decline since November 2011 and is off 7% from its March high; the Dow and S&P 500 are down about 3% from their highs.
Some signs suggest that this pullback — or another one sometime soon — could get much more severe. Why?
Three basic reasons:
- Stocks are still very expensive
- Corporate profit margins are at record highs
- The Fed is now tightening
Let's take those one at a time.
Even after the recent drops, stocks appear to be very expensive. Does a high PE mean the market is going to crash? No. But unless it's "different this time," a high PE means we're likely to have lousy returns for the next seven to 10 years.
So that's price. Next comes profit margins.
One reason stocks are so expensiveRead More »from 3 reasons why this pullback could get much more severe