Bloomberg News: Investment Banks Turn Sour on U.S. Equity Outlook

Article by Anchalee Worrachate and Abhishek Vishnoi in Bloomberg News

Warnings are getting louder that the relentless runup in American equity prices is set to falter.

Strategists at Goldman Sachs Group Inc., Morgan Stanley and Citigroup Inc. issued fresh missives on the potential for negative shocks to upend a streak of gains. The spreading delta virus strain, a flagging global growth recovery or moves by central banks to exit pandemic-era stimulus programs all pose risks.

“High valuations have increased market fragility,” Christian Mueller-Glissmann, managing director of portfolio strategy and asset allocation at Goldman Sachs, said in an interview. “If there is a new negative development, it could generate growth shocks that lead to rapid de-risking.”

Positioning has become ultra-bullish, with longs on the S&P 500 outnumbering shorts by nearly 10 to 1. Half of those bets are likely to face losses on a drop in the index of as little as 2.2%. And even a small correction could be amplified by forced long liquidation, Citigroup strategists led by Chris Montagu warned. 

Morgan Stanley slashed U.S. equities to underweight and global stocks to equal-weight on Tuesday, citing “outsized risk” to growth through October. Credit Suisse Group AG, meanwhile, said it maintains a small underweight on U.S. equities due to reasons such as extreme valuations and regulatory risk. 

While no one is predicting a sharp selloff, a summer stock binge has left investors over-extended and vulnerable to any hint of bad news. After seven consecutive months of gains in the S&P 500 Index -- the longest since January 2018 -- many see equities ripe for a pullback in the seasonally poor month of September. 

“We are going to have a period where data is going to be weak in September at the time when you have a heightened risk of delta variant and school reopening,” Morgan Stanley cross-asset strategist Andrew Sheets said in an interview with Bloomberg TV Wednesday. “If the data does stay soft, the market valuations just haven’t adjusted like other parts of the market have.”

Technical signals also point to a downturn, with momentum and volatility suggesting institutional sentiment is ......

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