Wall Street warning investors to get ready for stocks to drop
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 Julian Emanuel is expecting a more substantial decline of as much as 15 per cent. 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,' Mr Wilson said in his note to clients.
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'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 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 gotten 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% decline in the SPDR S&P 500 ETF Trust (SPY) over the next 60 days compared to 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 emphasizes 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 one-and-a-half-to-two months on average, and larger ones of 5 per cent or more every three-to-four months.
'We're buyers of dips,' Mr Wilson told clients.
So far, traders are heeding to the advice. The S&P 500 and Nasdaq 100 Index are both up than 1 per cent on Aug 4 after Aug 1's sell-off on optimism that the Federal Reserve will cut interest rates soon. BLOOMBERG
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
CNA
6 hours ago
- CNA
Japan's Topix hits record high on Wall Street rally, solid earnings
TOKYO :Japan's Topix index touched a record high on Thursday, tracking strong overnight gains on Wall Street, while solid corporate earnings from domestic firms reinforced expectations of wage growth. The broader Topix was up nearly 1 per cent at 2,993.14, as of 0206 GMT. Earlier in the session, the benchmark index hit an all-time peak of 2,993.21. The Nikkei climbed 0.9 per cent to 41,151.07. Both indexes were on track for a third consecutive session of gains, provided the current momentum holds. The three-day rally follows a sharp decline on Monday, when the Nikkei posted its largest drop in two months amid growing concerns over the U.S. economy and trade. "The market is now convinced that the U.S. economy will not slow down," said Hiroyuki Ueno, chief strategist, Sumitomo Mitsui Trust Asset Management. "That is important for the Bank of Japan's decision process for raising interest rates. With solid corporate earnings results and a trend for wage increases, the market now expects the BOJ to raise rates by the end of the year," Ueno said. However, government data released on Wednesday indicated that Japan's real wages fell for a sixth consecutive month in June, as inflation continued to outpace pay growth. The trend clouded the outlook for a BOJ policy shift, with wage growth seen as a key indicator for sustainable inflation. There is growing expectation that the U.S. Federal Reserve could begin cutting interest rates as early as September to support the economy. Shares of Mitsubishi UFJ Financial Group rose 1.8 per cent, providing the biggest boost to the Topix, while Sumitomo Mitsui Financial Group gained 1.56 per cent. M3's shares surged 22 per cent after Goldman Sachs raised the target price for the medical services platform operator to 2,300 yen from 2,250 yen. Cosmetic maker Shiseido jumped 10 per cent. Chip-making equipment maker Tokyo Electron fell for a third day, falling 2.7 per cent on Thursday to weigh on the Nikkei the most. Chip-testing equipment maker Advantest fell 0.7 per cent. Shares of chipmakers declined on concerns over a potential slowdown in global chip production after U.S. President Donald Trump said Washington would impose a tariff of about 100 per cent on semiconductor chips imported from countries not producing in America or planning to do so.
Business Times
10 hours ago
- Business Times
China's property slump to last longer than expected: UBS
[HONG KONG] UBS Group, which had been among the few firms predicting a recovery in China's property sector, now expects a delay following a renewed sales slowdown in the second quarter. John Lam, head of China and Hong Kong property research at the Swiss bank, said in March that home prices in top-tier cities would 'turn stable' by early 2026. He now anticipates that to happen in mid-to-late 2026, unless Beijing introduces additional stimulus measures. 'The sales momentum has become tepid in recent months,' Lam said. 'If that continues, a recovery will occur later than expected.' Lam is known for downgrading China Evergrande Group at the start of 2021, 11 months before the nation's most indebted developer defaulted during the housing meltdown. He also took a bold stance last year by turning bullish on the sector, even as most of his peers were forecasting a further decline. Weakening demand has prolonged the time it takes to sell homes, according to Lam. In March, inventory turnover in tier-one cities had fallen to an average of 14 months, the same level as 2015 at the onset of an upcycle, he said. But that rose to 20.7 months at the end of June, meaning it will take longer to absorb housing stock even in the largest cities, which are widely expected to rebound first. Global banks are divided on the outlook for China real estate, which has been a drag on the economy for more than four years. Morgan Stanley forecasts property sales to remain weak in the third quarter. HSBC Holdings analysts are seeing a 'highly divergent' recovery, which benefits quality state developers with strong pricing power in top-tier cities and robust project pipelines there. A NEWSLETTER FOR YOU Tuesday, 12 pm Property Insights Get an exclusive analysis of real estate and property news in Singapore and beyond. Sign Up Sign Up Renewed slump Lam mainly based his March prediction on an easing of residential oversupply after many cash-strapped developers stopped buying land. Last year, housing starts by builders tumbled 63 per cent from the onset of the downturn in 2021, more than the 48 per cent drop in home sales by area. The basis of his call remains unchanged. China's total housing inventory has continued to fall since the end of March, according to Lam. It's just taking longer to shrink it down. New-home sales by the 100 largest developers have fallen more than 20 per cent for two consecutive months, China Real Estate Information Corporation data show. The worsening decline signals the effects of a stimulus campaign since last September are wearing off. Prices of new homes fell 0.27 per cent in June from May, the most in eight months. Lam sees one bright area for the market: real estate investment trusts. He is recommending stock investors look for the potential upside when developers spin off their shopping malls to Chinese Reits, which have seen demand soar this year in the hunt for yield. China launched its Reit market in 2021 as a way to channel capital into large infrastructure projects in exchange for a relatively consistent flow of dividend income. It expanded the programme to include shopping malls in 2023. Investors have been snapping up these funds this year, seeking higher returns as sovereign bond yields hover near record lows. Among Asia's major markets, China Reits delivered the second-highest returns in the first half of 2025, Bloomberg Intelligence analysts Kristy Hung and Monica Si wrote in a note in July. Valuations for the sector have also remained resilient compared with a drop of as much as 84 per cent for developers' bonds and stocks during the same period, the BI researchers said. Stock catalyst A Reit listing of a developer's malls will likely provide a stock catalyst for the builder itself, Lam said. Higher valuation of malls listed on a Reit usually implies that other malls owned by the developer have been undervalued, he said. Major Chinese developer stocks listed in Hong Kong are trading at just 0.25 times the book value of their assets on average, according to data compiled by Bloomberg. For about 70 Reits listed in mainland China, the average ratio is 1.4. 'China's real estate financing may undergo a major structural change in the next three to five years,' Lam said. 'Expansion of the Reit sector is set to make up for shrinking market value of homebuilder stocks.' BLOOMBERG
Business Times
12 hours ago
- Business Times
US: Stocks rise as Apple surges
[NEW YORK] Wall Street stocks rose on Wednesday with Apple and most other large tech companies rallying as markets largely shrugged off US President Donald Trump's latest tariff hikes. Apple piled on more than five per cent after White House officials said the tech giant plans an additional US$100 billion in capital spending in the United States. Amazon and Google parent Alphabet were among the other large tech names that also rose. 'By standing up and publicly announcing a domestic investment with President Trump, it reduces the likelihood of Trump imposing new tariff burdens on Apple,' said FHN Financial's Chris Low. The Dow Jones Industrial Average finished up 0.2 per cent at 44,193.12. The broad-based S&P 500 gained 0.7 per cent to 6,345.06, while the tech-rich Nasdaq Composite Index climbed 1.2 per cent to 21,169.42, less than 10 points from an all-time record. Trump ordered an additional 25 per cent tariff on Indian goods. The levy, which is expected to come into force in three weeks, is due to New Delhi's continued purchase of Russian oil. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up A new wave of Trump tariffs is due to take effect on Thursday on dozens of other economies. But Wednesday's gains suggest investors are becoming more inured to the levies. 'This is a market that's fuelled by enthusiasm,' said Jack Ablin of Cresset Capital Management. 'Nothing has blown up yet. Perhaps the impact of tariffs won't be as great as investors originally feared.' Among individual companies, Disney fell 2.7 per cent as it reported around a doubling of profits to US$5.3 billion and announced a series of new deals to boost its upcoming ESPN streaming venture. But McDonald's jumped 3.0 per cent as it reported an 11-per cent rise in profits to US$2.3 billion. While the fast food giant returned to sales growth at US stores, it warned that low-income consumers were cutting back amid financial pressures. AFP
