US-North Korea war of words can derail Wall Street stock rally

Cracks are showing in what has been a virtually non-stop U.S. equity rally after a rapid escalation of tension between North Korea and the United States this week.

Market analysts expect that the pullback in stocks due to the increasingly aggressive tone in exchanges between Washington and Pyongyang will continue, although investors hope that the selling will not escalate to a correction - a decline of 10 per cent or more.

The benchmark S&P 500 index tumbled more than 1 per cent on Thursday, only the third time this year it has fallen that much, while the Nasdaq shed more than 2 per cent.

"Markets are looking for any reason at all for a reset. That reset is being triggered by North Korea geopolitical concern and stretched valuations," said Peter Kenny, senior market strategist at Global Markets Advisory Group in New York. "I do think we could see markets pull back between 1 and 5 per cent."

The S&P is trading near its most expensive valuation level since 2004, as measured by the price-to-12-month forward earnings ratio.
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