A chorus of leading Wall Street firms has cautioned investors to prepare for a possible correction in U.S. equities as stretched valuations collide with weakening economic data.
On Monday, strategists from Morgan Stanley, Deutsche Bank AG, and Evercore ISI all issued warnings that the S&P 500 Index could face a pullback in the coming weeks, even after a sharp rally since April that pushed the benchmark to record highs.
Morgan Stanley’s chief strategist Mike Wilson, projected a correction of up to 10% this quarter, citing the impact of tariffs on both consumers and corporate balance sheets. Evercore ISI’s Julian Emanuel offered a more bearish outlook, warning of a potential 15% decline.
Analysts at Deutsche Bank, led by Parag Thatte, noted that a small drawdown is overdue given equities have advanced for more than three straight months.
“Over the last couple of weeks, we have noted that investors should expect a modest pullback in the third quarter,” Wilson said in a note to clients.
The warnings follow signs of a weakening U.S. economy as last week’s data showed a rise in inflation alongside slowing job growth and consumer spending. Historical trends add to the caution with Bloomberg data showing that August and September have been the weakest months for the S&P 500 over the past three decades, recording an average decline of 0.7% compared with gains in other months.
Valuations also remain elevated as the S&P 500’s 14-day relative strength index (RSI) hit 76 last week, its highest since July 2024 and well above the 70 threshold often seen as a signal of overheating.
Options markets further reflected concerns with contracts hedging against a 10% decline in the SPDR S&P 500 ETF Trust (SPY) over the next 60 days trading at the highest relative costs since the regional banking crisis in May 2023.
Despite the warnings, strategists maintained that the long-term outlook for equities remains positive. Emanuel stressed that the broader bull market remains intact and advised clients to stay invested, particularly in firms benefiting from the artificial intelligence sector boom.
Wilson echoed the sentiment, telling clients, “We’re buyers of dips.” Deutsche Bank analysts highlighted that pullbacks of around 3% typically occur every one-and-a-half to two months, while larger corrections of 5% or more tend to happen every three to four months.
Traders appeared to follow the guidance, with both the S&P 500 and Nasdaq 100 advancing more than 1% on Monday after a brief selloff last week, buoyed by expectations that the Federal Reserve could move closer to cutting interest rates.
