If the AI Rally Falters, Will a Summer Correction Materialize? Wall Street Warns of Stock Market Volatility

"Wall Street is too optimistic"...The reason for the warning of a stock market crash this summer

▲ US stock market, Nasdaq, semiconductor stocks, bear market/AI generated image ©

With Wall Street's investor sentiment soaring to an all-time high, a warning has emerged that excessive optimism could actually trigger a correction in the US stock market this summer. Analysis suggests that with weakness in tech stocks, falling copper prices, and high earnings expectations overlapping simultaneously, the market could face a larger correction than anticipated.

According to Watcher.Guru, a cryptocurrency specialized media outlet, on July 5 (local time), Jason Hunter, a technical analyst at US investment bank JPMorgan, diagnosed that as the Q2 earnings season begins, record-high Wall Street optimism, combined with several risk factors, could trigger a full-fledged stock market correction. Currently, approximately 60% of S&P 500 stocks have a 'Buy' rating, which is an all-time high.

Hunter cited the weakness of the 'Magnificent Seven' stocks, which have recently led the stock market, as the biggest risk factor. Last June, the Roundhill Magnificent Seven ETF fell by 9%, and major tech stocks such as Amazon, Meta, Alphabet, and Apple also underwent significant corrections. He warned that the current trend in large-cap tech stocks shows similarities to the dot-com bubble of 1999-2000, and if these stocks fail to rebound this summer, deteriorating investor sentiment and position unwinding could continue into the fall.

Falling copper prices were also presented as another warning sign. Copper, often referred to as a leading economic indicator, is still up 8% this year but has been declining for three consecutive weeks recently. Hunter explained that charts for industrial metals, including copper, show the potential for forming a peak, which could be a precursor to a slowdown in global manufacturing. He assessed that the simultaneous weakness in large-cap tech stocks and industrial metals further amplifies the market's potential downside risk.

Wall Street's high expectations were also cited as a burden. Charlie Bilello of Creative Planning analyzed that while approximately 60% of S&P 500 companies currently have a 'Buy' rating, 'Hold' ratings have decreased, and 'Sell' ratings have barely increased. Furthermore, the market expects S&P 500 earnings per share (EPS) to increase by 22% year-over-year in Q2, which is the highest forecast ahead of an earnings season since 2021. He pointed out that the more investors expect good news, the less room there is for positive earnings surprises.

However, not all experts have presented pessimistic outlooks. Ben Snider of Goldman Sachs projected that a robust macroeconomic environment and continued expansion of artificial intelligence (AI) investments could meet high earnings expectations. The media reported that if companies' Q2 earnings, to be released in the coming weeks, fall short of market expectations, the summer stock market correction that some strategists fear could materialize, but for now, it remains purely a discussion of possibilities.

*Disclaimer: This article is for investment reference only and we are not responsible for any investment losses based on it. The content should be interpreted for informational purposes only.*