Two catalysts that could trigger a stock market correction

Global strategists from Citigroup and JPMorgan both fired off warnings Monday about events that could affect the rally in equities. Citigroup pointed to rising rates as a threat, and JPMorgan analysts said they are concerned second-half earnings may not be as robust as the market is anticipating.

Stock prices continue to rise despite concerns about lofty valuations. The S&P 500’s price-earnings ratio is 17.5 times forward 12 months earnings.

“I find it hard to put money to work here,” said Thomas Lee, co-founder of Fundstrat. With major banks kicking off second-quarter earnings reports at the end of the week, Lee says earnings will be the “acid test” for stocks. While this quarter should be fine, he said there are doubts about how strong profits will be later in the year, despite high expectations.

The S&P 500 has only seen two days of a 1 percent or greater decline this year – March 21 and May 17. The index was down 6 percent over a three-week period around the Brexit vote in June 2016, but it hasn’t fallen more than 10 percent since the 14 percent correction that began in late 2015 and ended in February 2016. Year to date, the S&P is up 8.4 percent.

In the past two weeks, sovereign yields have risen amid a seeming sea change in thinking about global central banks and interest rate direction, which started with hawkish comments from European Central Bank President Mario Draghi.

“Rising bond yields have started to worry investors with signs of increased volatility across a number of risk assets and emerging markets. Recent data have shown outflows from U.S. and European equities as well as from EM bond funds and reduced inflows to EM equities,” Citi strategists wrote.

Citi said the stock market could be at risk if there is a global economic slowdown coupled with softer earnings. Citi strategists also note that “monetary tightening could be a threat if central banks are perceived to have got ahead of the curve.”

Global strategists at JPMorgan raised the flag on earnings, but pointed out that the second quarter should be strong.

S&P 500 earnings are expected to be up 7.9 percent in the second quarter, following a 15 percent gain in first-quarter earnings, according to Thomson Reuters.

The JPMorgan strategists warned in May about the potential for an equities consolidation and they recommended some profit-taking at the time.

Source: Bloomberg Pro Terminal

Jr Trader Alexander Kumanov

 Varchev Traders

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