Wall Street is abuzz with talk of a potential market correction as the S&P 500’s impressive five-month rally may be poised for a pause. Influential strategists from major financial institutions have recently voiced concerns, anticipating a possible downturn. Mike Wilson from Morgan Stanley is bracing for a correction of up to 10 per cent, while Parag Thatte at Deutsche Bank expects a smaller drawdown. Manish Kabra of Societe Generale suggests a ‘pause for breath’ in the September quarter, and Julian Emanuel at Evercore anticipates a fall of up to 15 per cent.
Several factors contribute to this anticipated correction. The S&P 500 has surged by 27 per cent over the past five months, reaching new all-time highs. Historical data indicates that the S&P 500 experiences smaller pullbacks of around 3 per cent every couple of months and larger pullbacks of approximately 5 per cent every three to four months. Emanuel argues that the current market is particularly vulnerable, as investors have driven the S&P 500’s earnings multiple to 25 times, a level not seen since the dotcom bubble. Recent news regarding tariffs, rising artificial intelligence earnings, and significant mergers and acquisitions has left stocks with limited room to grow.
Seasonality also plays a role, as August and September have historically been the worst months for investors, with an average fall of 0.7 per cent in each month over the past 30 years, compared to an average gain of 1.1 per cent in other months. Adding to the caution is the state of the US economy. Recent jobs report has raised fears about a slowdown in the American labour market and potential squeeze on the real economy due to slower growth and higher inflation.
Despite these predictions of a market reversal, the strategists remain broadly bullish in the longer term. Wilson argues that the US recession actually began in mid-2023. He believes that equity markets are forward-looking, while most economic indicators lag behind. This conviction, coupled with the belief that American companies have already undergone cost-cutting measures, fuels his optimism about future earnings potential and overall market performance.
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