Wall Street Warns of Short-Term Decline as Caution Signals Persist for U.S. Stock Market

Economic Indicators and Valuation Concerns
Evercore: "Could Drop by Up to 15%"
Deutsche Bank: "Upward Trend Will Continue in the Long Run"

Warnings that the U.S. stock market may face a short-term correction continue to emerge. Wall Street analysts have pointed out that, while stock prices remain at record highs, factors such as slowing economic indicators, seasonal weakness, and technical overheating could be reflected in the market.

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According to Bloomberg News on August 4 (local time), major U.S. investment banks such as Morgan Stanley and Evercore ISI, as well as Germany's largest commercial bank Deutsche Bank, stated in reports that the S&P 500, the benchmark index of the New York Stock Exchange, could decline in the short term over the next few weeks or months.

Mike Wilson, a strategist at Morgan Stanley, predicted that U.S. government tariffs would negatively impact private consumption and corporate management, resulting in a stock market correction of up to 10% this quarter. In a memo to clients, he wrote, "Investors have come to expect a slight decline in the third quarter over the past few weeks."

Julian Emanuel, an analyst at Evercore ISI, forecasted that the market could drop by as much as 15%. The analysis team led by Parag Thatte at Deutsche Bank also noted that, since the U.S. market has been strong for over three months, a slight pullback is inevitable.

Recently released U.S. economic indicators show a slight increase in inflation and a slowdown in both the labor market and consumer spending. However, stock prices have surged since hitting a low in April and remain at record highs, leading to concerns that valuations such as the price-to-earnings ratio (PER) are excessive.

Another reason for the correction expectations is that the New York stock market has entered a seasonally weak period. According to Bloomberg data, over the past 30 years, the S&P 500 index has recorded a decline of 0.7% in both August and September, marking its weakest performance. In contrast, the index rose an average of 1.1% in other months.

Technical indicators are also signaling a sell-off. The Relative Strength Index (RSI), an auxiliary indicator that reflects buying and selling pressure, recently surpassed 76 for the S&P 500, its highest level since July last year. Bloomberg News noted, "Market experts consider an RSI above 70 as an 'overheating signal.'"

Investor concerns about a correction are also evident in the options market. The cost of hedging against a 10% decline in the SPDR S&P 500 ETF Trust (SPY), an exchange-traded fund tracking the S&P 500 index, over the next 60 days was the highest since the regional banking crisis in May 2023, when compared to the cost of hedging against a 10% rise.

There are also predictions that the market will return to a bullish trend after a short-term correction. Evercore ISI advised that, despite volatility, the market will be bullish in the long run and recommended investing in companies benefiting from artificial intelligence (AI).

Deutsche Bank also pointed out that, in the past, the S&P 500 index dropped by about 3% every 1.5 to 2 months on average, but when the period was extended to 3 to 4 months, it rose by more than 5%. The bank advised, "Maintain a buy-on-dip approach when stock prices fall."