Several major financial institutions, including Morgan Stanley, Deutsche Bank AG, and Evercore ISI, are cautioning investors that the S&P 500 may be poised for a decline in the weeks and months ahead.
Mike Wilson, Chief Investment Officer at Morgan Stanley, is forecasting a market correction of up to 10% this quarter, citing the adverse impact of tariffs on both consumer and corporate balance sheets. Julian Emanuel of Evercore is projecting a more substantial pullback of up to 15%. Meanwhile, a team at Deutsche Bank, led by Parag Thatte, notes that a modest decline in equities is long overdue, especially following more than three consecutive months of upward momentum.
These warnings come against the backdrop of increasing concern about the trajectory of the U.S. economy. Recent data has pointed to rising inflation, coupled with a slowdown in job growth and consumer spending, raising doubts about the durability of the post-pandemic recovery.
Seasonal factors also suggest increased downside risk. Historically, August and September have been the weakest months for U.S. equities. Over the past three decades, the S&P 500 has declined by an average of 0.7% in each of those months, compared with an average gain of 1.1% during the rest of the year.
Further evidence of market caution is visible in the options market, where hedging activity is intensifying. The cost of contracts protecting against a 10% drop in the SPDR S&P 500 ETF Trust (SPY) over the next 60 days has risen to levels not seen since the U.S. regional banking crisis in May 2023, relative to contracts betting on a comparable upside move.
Despite the short-term volatility, Evercore strategists emphasize that the long-term bull market remains intact. They continue to recommend that clients stay invested, particularly in companies positioned to benefit from the ongoing artificial intelligence boom, which they view as a key driver of future market growth.