Wall Street giants sound alarms and warn of a stock market crash

Warnings are mounting that the continued rise in US stock prices will falter. Strategists at Goldman Sachs, Morgan Stanley and Citigroup have issued new messages regarding the potential for negative shocks to undermine the winning streak.

Strategists have identified the factors behind the shift in their view of the stock market, due to both the spread of the delta strain of the Corona virus, the resumption of weak global growth, and central bank moves to exit stimulus programs in the era of the pandemic, which all involve risks.

“Higher valuations have increased the fragility of the market,” said Christian Mueller-Glesman, managing director of portfolio strategy andasset allocation by Goldman Sachs. “If there is a new negative development, it can generate growth shocks that quickly reduce the risks.”

Long positions are getting very bullish, as the S&P 500 outperformed short positions by around 10 to 1. Half of these bets are likely to suffer losses when the index falls 2.2%.

Citigroup strategists led by Chris Montagu have warned that even a small correction could be amplified by the forced liquidation of currently open margin positions.

Meanwhile, Morgan Stanley has reduced the relative weight of US equities relative to global stocks in weight-like decline on Tuesday, citing “significant risks” to growth through October. Meanwhile, Credit Suisse Group said it held a small devaluation of US equities for reasons such as high valuations and regulatory risks.

While no one expects a strong selloff, the stock crash has left investors too tense and vulnerable to any hint of bad news.

After seven consecutive months of gains in the S&P 500 – the longest since January 2018 – many see the stock poised for a September pullback.

“We will have a period in that data will be weak in September, while the risks of variable delta and school reopening are high, “said Andrew Sheets, strategic analyst for wealth management at Morgan Stanley.” If data remains weak, market valuations are not revised. ” Like in other parts of the economy.

Retail investors are seen as the main force behind the recent gains. According to JPMorgan, they invested nearly $ 30 billion in cash in July and August in US stocks and ETFs, the best in a period of two months. They can also be the foundation that can keep the market stable, as long as it’s easy.

“Retail investors have been buying stocks and equity funds at such a steady and robust pace that a correction in stocks seems highly unlikely,” wrote JPMorgan’s global strategists, including Nikolaos Panigertzoglou. in a note dated 18 September. “It remains to be seen whether the upcoming change in Federal Reserve policy will change the attitude of individual investors towards equities,” he added.

These positions will eventually be tested by policymakers at the Fed and the European Central Bank who are laying the groundwork for scaling back their asset purchase programs. Additionally, traders are not expecting any news of a Fed policy slowdown until at least November and have ruled out a rate hike, but it hasn’t been long since rate hikes held back another furious bull market in 2018.

Technical signals also point to a pullback, with momentum and volatility signaling institutions overheating, according to an analysis by Bloomberg Intelligence.

“The problem is that the markets are valued as perfect while fragile, especially since there hasn’t been a correction of more than 10% since the March 2020 low,” he said. in a noted Lisa Chalet, chief investment officer of Morgan Stanley Asset Management.

He wrote that the bank’s Global Investment Committee expects the stock market to drop 10% to 15% before the end of the year.

He added: “The strength of the major US equity indices in August and early September, which pushed to new consecutive daily highs in the face of worrying developments, is no longer constructive.” profits in index funds. “Equity indices overlooked the re-emergence of the Corona epidemic, the decline in consumer confidence, the rise in interest rates and significant geopolitical shifts.

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