High valuations meet a weak economy, Wall Street warns in unison: S&P 500 may drop by 10% to 15%

Media reports indicate that analysts from several major Wall Street firms have recently issued warnings, advising clients to prepare for a pullback in U.S. stocks, as high market valuations collide with weakening economic data.

On Monday, analysts from Morgan Stanley, Deutsche Bank, and Evercore ISI all warned that the S&P 500 index could experience a short-term decline in the coming weeks or months. Previously, the S&P 500 index had rapidly risen from its April low, reaching historical highs. On Monday, the S&P 500 index rose by 1.47%, closing at 6329.94 points.

Morgan Stanley strategist Mike Wilson expects that the S&P 500 index could see a correction of up to 10% this quarter, as tariffs begin to impact consumer and corporate finances. Evercore's Julian Emanuel predicts a decline of as much as 15%. The analyst team at Deutsche Bank, led by Parag Thatte, noted that the stock market has risen for three consecutive months, and a pullback was overdue.

Wilson stated in a report to clients,

“We have been reminding investors over the past few weeks to expect a moderate pullback in the third quarter.”

These warnings come amid growing concerns about the U.S. economic outlook. Last week’s data showed that U.S. inflation is rising again, while job growth and consumer spending are slowing. Additionally, U.S. stocks are entering a period that typically performs the weakest: according to media analysis, the S&P 500 index has historically shown the worst average performance in August and September over the past 30 years, with an average monthly decline of 0.7%, while other months average a gain of 1.1%.

Moreover, stock prices have also become expensive, with the S&P 500 index's 14-day Relative Strength Index (RSI) breaking above 76 last week, reaching its highest level since July 2024, when U.S. stocks briefly peaked in the summer. This value also exceeds the 70 threshold that technical analysts consider "overheated."

At the same time, options trading indicates that market concerns about a downturn are intensifying, with the cost of hedging against another significant drop in the stock market becoming higher. For example, in the case of the SPDR S&P 500 ETF (SPY), the implied volatility premium between 60-day put options and equivalent call options has risen to its highest level since the regional banking crisis in 2023.

However, despite the rising short-term bearish sentiment, these warnings generally carry an important premise of "bullish but buy on the dip."

Evercore analyst Emanuel emphasized that despite expected volatility, the long-term bullish trend of the stock market remains intact. He advises clients to maintain their positions, especially in companies benefiting from the artificial intelligence boom. Deutsche Bank's Thatte pointed out that historically, the S&P 500 experiences a small pullback of about 3% approximately every 1.5 to 2 months, and a larger pullback of over 5% every 3 to 4 months "We will buy on the pullback," Wilson told clients.

So far, traders seem to have accepted this advice. On Monday, the S&P 500 Index and the Nasdaq 100 Index both rose by more than 1%, following a pullback last Friday, as expectations for an imminent interest rate cut by the Federal Reserve have resurfaced