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Historical pullbacks: Traders work on the floor of the New York Stock Exchange. Some analysts say the long-term bull market in stocks is still intact despite expectations for volatility and advise clients to stay invested — AFP
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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 Monday, Morgan Stanley, Deutsche Bank AG 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% this quarter as tariffs hit consumers and corporate balance sheets.
Evercore’s Julian Emanuel is expecting a more substantial decline of as much as 15%.
And a team at Deutsche Bank led by Parag Thatte notes that a small drawdown in equities is overdue considering they’ve been on a tear for over three months.
“Over the last couple of weeks, we have noted that investors should expect a modest pullback in the third quarter,” Wilson said in his note to clients.
The calls are coming amid mounting concerns about the United States 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’s 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% on average in each month, compared with a 1.1% gain on average across other months, according to data compiled by Bloomberg.
In addition, stocks have gotten expensive.
The S&P 500’s 14-day relative strength index topped 76 last week its highest point since July 2024 before US stocks 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% decline in the SPDR S&P 500 ETF Trust over the next 60 days compared to the cost of contracts hedging against a similar rally are 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, 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 Thatte points out that historically the S&P 500 experiences small pullbacks of around 3% every one-and-a-half-to-two months on average, and larger ones of 5% or more every three-to-four months.
“We’re buyers of dips,” Wilson told clients. So far, traders are heeding the advice.
“The S&P 500 and Nasdaq 100 Index are both up more than 1% on Monday after last Friday’s selloff on optimism that the Federal Reserve will cut interest rates soon.” — Bloomberg
Disclaimer
The information provided in this report is of a general nature and has been prepared for information purposes only. It is not intended to constitute research or as advice for any investor. The information in this report is not and should not be construed or considered as an offer, recommendation or solicitation for investments. Investors are advised to make their own independent evaluation of the information contained in this report, consider their own individual investment objectives, financial situation and particular needs and should seek appropriate personalised financial advice from a qualified professional to suit individual circumstances and risk profile. The information contained in this report is prepared from data believed to be correct and reliable at the time of issuance of this report. While every effort is made to ensure the information is up-to-date and correct, Bond and Sukuk Information Platform Sdn Bhd (“the Company”) does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information contained in this report and accordingly, neither the Company nor any of its affiliates nor its related persons shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.
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