A 10% correction on Wall Street “seems quite reasonable,” so any weakness catalysts should be closely watched , as valuations are not attractive amid a period of “uncomfortable sentiment signals,” according to analysts at Citigroup.

“Our panic / euphoria model remains very high and warns of upcoming losses,” analysts say in a Citi research note after markets closed on Wednesday. “This is the longest period of exuberant readings without a market correction since 1999/2000 and we anticipate that something will give.”

The US stock market has seen an unusual number of new all-time highs this year. As they say, everything that goes up must come down. Not just Citi, they have also released a similar warning from Bank of Amrcia.

The stock market has risen relentlessly even long before the economic recovery began. “Economic recoveries are usually followed by corrections and that growth has peaked together with an early reduction in monetary stimulus increases the risk,” Bank of Amercia analysts say in a note published in early August.

In the case of the US, the recovery has been underway for almost a year, a period in which the rebound in both economic activity and risk assets has been staggering. “Although we have seen idiosyncratic corrections and rotations in growth, value and reopening operations, we have yet to see a sustained reduction and correction in risk assets,” they warn.

Too complacent
“People and investors are too complacent,” warn Citi analysts. “Interestingly, we found that our conversations with clients have a qualitative element of not worrying about higher taxes,” or a move by the Federal Reserve reducing its bond purchases or inflation, despite a June survey finding that more than half thought that inflation could be more ‘sticky’ and last up to twelve more months.

In a note this week, Darrell Cronk, chief investment officer for Wells Fargo’s investment and wealth management division, ranked inflation at the top of his list of 10 market risks, noting that the S&P 500 index is it has spiked into the pandemic without having suffered a setback of at least 5% since last October.

US stocks have been mixed this week. Major benchmarks have struggled to maintain their good tone following investors’ reaction to the release of the Fed’s policy meeting minutes on Wednesday afternoon, which showed that most of its members considered it appropriate to start. to slow down its pace of monthly bond purchases later this year.

Citi’s “panic / euphoria model” reveals that “investors have been overly optimistic” for many months, the bank’s analysts say. “A pullback may be imminent, especially as earnings growth slows.”

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