Multiple uncertainties may cause a 10% pullback.

After the strong rally led by technology giants in the first half of the year, there were very few analysts on Wall Street who were bearish on U.S. stocks. However, some cautious views have begun to emerge recently.

Michael Wilson, a star strategist at Morgan Stanley, said that as uncertainty surrounding U.S. politics, corporate earnings and Federal Reserve policy begins to weigh on the market, investors should start preparing for a stock market correction. "A 10% correction is very likely between now and the election because uncertainty is likely to prevail."

Reversal of position

The Morgan Stanley strategist, known for his bearish views, reversed his stance in the first half of the year, raising his target for the S&P 500 and predicting that the index will reach 5,400 by the middle of next year.

Wilson said in a recent episode of his show that stock investors have managed to ignore all kinds of risks this year. Their solution to the tepid earnings growth shown by most companies has been to bet on a few high-quality growth stocks that have seen profits surge over the past year. While this strategy has generally worked, investors will eventually be forced to consider the possibility that the "bad news is good news" economic dynamic that has helped support the stock market recently may eventually backfire on the stock market.

The new earnings season is scheduled to kick off on Friday. The S&P 500 has risen 16% so far in 2024, driven by a handful of large stocks that are poised to benefit from emerging artificial intelligence technology.

Just 24% of stocks in the S&P 500 outperformed the index in the first half of the year, the third lowest since 1986, according to Bank of America.

Wilson said the third quarter will be "choppy."

In the coming weeks, the market will focus on whether profit growth in other industries begins to catch up with the two bellwethers of information technology and communications services to drive market breadth. As of the second quarter, analysts have raised their earnings forecasts more than they have lowered them, according to an index from Citigroup. Meanwhile, expectations for 12-month forward yields are at an all-time high. "Given high implied growth expectations, the market may need to see forecast upgrades and stronger-than-expected revenue growth driven by solid execution to sustain the recent gains or move further higher," Citigroup strategist Scott Chronert wrote in a note. "The concern is that while fundamentals are trending in the positive direction and consensus expectations are achievable, valuations suggest that buyers will demand more."

Art Hogan, chief market strategist at asset management firm B Riley Wealth, believes that if you are looking for more people to participate in this year's rebound, the second quarter earnings season is likely to be the start. He expects the S&P 500's expected price-to-earnings ratio to be about 21 times, but if the top ten stocks by market value are excluded, the average price-to-earnings ratio for the rest of the index will drop to 16.5.

Wells Fargo Research Institute said in a report sent to China Business News that a greater balance in profitability could lead to broader market participation in the coming quarters. It recommends that investors reduce their holdings in the technology sector and take advantage of the valuation advantages of the energy, healthcare, industrial and materials sectors.

The Fed and the Election

Uncertainty surrounding the outlook for monetary policy and the election could also be catalysts for market declines in the coming months. Wilson sees only about a 25% chance that the S&P 500 will be at or above its current level this year.

The latest non-farm report has made many institutions feel the potential danger. Bob Schwartz, senior economist at Oxford Economics, said in an interview with Yicai Global that the path of monetary policy is not clear now, but the Fed needs to act cautiously. Historically, if it waits for concrete evidence of problems in the labor market, it may be too late.

Kevin Gordon, senior investment strategist at Charles Schwab, believes that as the unemployment rate breaks through 4%, the rise needs to be closely watched. "Once you start to see it creeping up, it's hard to put it back in the bottle."

One possible scenario is that the Fed will eventually lower interest rates to help the struggling economy, rather than cutting rates to ensure a soft landing. Matt Stucky, chief portfolio manager of equities at Northwestern Mutual Wealth Management, analyzed the unfavorable factors such as weak economic data, rising consumer delinquencies and the Fed's high policy rate, and believed that investors should prepare their portfolios for a mild recession in the next 12 to 18 months. "We think the risks are rising," he said.

The US election has added new variables after the first round of TV debates. According to CCTV, US President Biden rejected the call from Democratic lawmakers on the 8th to withdraw from the presidential campaign. He said that he was not blind to the interests and concerns of this election, and if he did not absolutely believe that he was the best candidate to defeat Trump in 2024, he would not run again.

The disputes within the Democratic Party have also made the distribution of power between the two parties in the Senate and the House of Representatives behind the election foggy. As the election progresses, the risks and uncertainties in policy positions such as debt, taxation, and diplomacy may impact capital market sentiment.

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