US Stock Market
Image: CNBC

US Stock Market is staring at a potential rough autumn, analysts warn

Following the stock market’s record-breaking bull run this year, many Wall Street analysts are warning that investors may be in for a rough ride in the coming weeks and months.

US Stock Market
Image: CNBC

Morgan Stanley, Citigroup Inc., Deutsche Bank AG, and Bank of America Corp. all issued notes this month cautioning investors about present dangers in the US equities market. With the S&P 500 setting 54 new highs through Thursday this year, the highest in that time span since 1995, some experts feel a downturn or, at the very least, flatter returns are on the way.

A mix of factors, including exuberant investor optimism, stretched valuations, and expectations that inflation and supply-chain disruptions may impact corporate profits, are behind the cautious view, according to the experts. In a report published on Wednesday, strategists at BofA Securities expressed their disappointment, asking, “What positive news is left?” “A lot of optimism is already factored in,” they said.”

The Bank of America team, led by Savita Subramanian, head of U.S. equities and quantitative strategy, lowered its year-end price goal for the S&P 500 to 4250, down 4.7 percent from the 4458.58 level reached on Friday.

The experts’ cautious view of US equities contrasts with the TINA—or “There Is No Alternative”—motto that has dominated market sentiment for much of the last year. Because interest rates on other assets, such as bonds, have been so low, many investors have justified their continued bullishness in equities. The Federal Reserve’s accommodative monetary policy, as well as the promise of high investment returns from a wide range of firms, from meme stocks to Covid-19 recipients, have continued to boost shares this year.

Some strategists, though, stated in their September notes that they were looking for further gains in other sectors of the market. Morgan Stanley analysts downgraded their recommendation on U.S. equities to “underweight” in a report last week, saying they prefer stocks in Europe and Japan and see cash as becoming more appealing to keep.

The stock market in the United States has already shown symptoms of weakening in recent trading sessions. Last week, all three main indices fell, and they are now down for the month. If the current trend continues, the S&P 500 will suffer its first monthly loss since January.

Analysts at Citi Research wrote in a report last week that they saw another risk for the market: the fear that the current bullish posture could magnify a market selloff. Long holdings on the S&P 500 outweigh short positions 10 to 1, according to a team of analysts led by Chris Montagu, who also stated that about half of long positions would be in the red if the benchmark index fell below 4435, which is less than 1% below Friday’s closing level.

According to the Citi report, “a modest correction may be exacerbated by forced long liquidation, driving the market farther down.”

Analysts’ warnings this month aren’t the first to emerge during the current bull market. Throughout 2021, a wide range of Wall Street market experts have expressed alarm about indicators of market excess, and investors have braced for a fall.

Even during periods of recession, however, U.S. equities have usually continued to rise. The S&P 500 dropped for a fifth straight session on Friday, its worst losing streak since February, finishing the week with a 1.7 percent loss.

The previous time the benchmark index lost so much in a single week was the week ending June 18, when it plummeted 1.9 percent. Over the next three weeks, the index increased by 4.9 percent.