NEW YORK – A chorus of stock market prognosticators at some of Wall Street’s biggest firms is warning clients to prepare for a pullback as sky-high equity valuations slam into souring economic data.
On Aug 4, Morgan Stanley, Deutsche Bank and Evercore ISI all cautioned that the S&P 500 Index is due for a near-term drop in the weeks and months ahead.
The predictions come after a furious rally from April’s lows that propelled the gauge to levels it has never seen before.
Morgan Stanley strategist Mike Wilson sees a correction of up to 10 per cent this quarter as tariffs hit consumers and corporate balance sheets.
Evercore’s Mr Julian Emanuel is expecting a more substantial decline of as much as 15 per cent.
A team at Deutsche Bank led by Mr Parag Thatte notes that a small drawdown in equities is overdue considering they have been on a tear for more than three months.
In his note to clients, Mr Wilson said: “Over the last couple of weeks, we have noted that investors should expect a modest pullback in the third quarter.”
The calls are coming amid mounting concerns about the US economy after data last week showed an uptick in inflation as well as weakening job growth and consumer spending.
In addition, stocks are entering what is usually their weakest time of the year.
Over the past three decades, the S&P 500 has performed the worst in August and September, losing 0.7 per cent on average in each month, compared with a 1.1 per cent gain on average across other months, according to data compiled by Bloomberg.
In addition, stocks have become expensive. The S&P 500’s 14-day relative strength index topped 76 last week – its highest point since July 2024 before US stock briefly peaked last summer and above the 70 level that market technicians view as a sign of overheating.
Options trading is also showing the fear of a downturn, as hedging against another rout becomes more expensive.
Contracts protecting against a 10 per cent decline in the SPDR S&P 500 ETF Trust (SPY) over the next 60 days compared with the cost of contracts hedging against a similar rally is hovering around levels not seen since the regional banking crisis in May 2023.
Still, despite the near-term concerns, the warnings come with a big bullish caveat: In the event of a dip, buy it.
At Evercore, Mr Emanuel emphasises that the long-term bull market in stocks is still intact despite expectations for volatility, and he advises clients to stay invested, particularly in companies capitalising on the artificial intelligence boom.
Deutsche’s Mr Thatte points out that historically, the S&P 500 experiences small pullbacks of around 3 per cent every 1½ to two months on average and larger ones of 5 per cent or more every three to four months.
Mr Wilson told clients: “We’re buyers of dips.”
So far, traders are heeding the advice. The S&P 500 and Nasdaq 100 Index are both up more than 1 per cent on Aug 4 after the Aug 1 sell-off on optimism that the Federal Reserve will cut interest rates soon. BLOOMBERG