Why Wall Street is bracing for a correction in stocks

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Yesterday I wrote about how stocks were on the recovery path after last week’s disappointing data. I also said I wasn’t sure how long the rally would last. Go figure, US equities and cryptos are back in the red today.

In the first few hours of trading, the S&P 500 was trading 0.5% lower while the Nasdaq Composite had lost 0.6%. BTC was 2% lower over the last 24 hours at that time.

Some of the biggest names on Wall Street say stocks have further to fall. In a Monday note, Morgan Stanley strategist Mike Wilson projected the S&P 500 is due for a decline of up to 10%. Also on Monday, Evercore senior managing director estimated the index will lose up to 15%.

Why might we be due for a correction?

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First of all, US equities have been on a tear this summer, and not just Big Tech. Let’s rewind: Megacap tech stocks were among the biggest losers in the Liberation Day aftermath — Nvidia, Microsoft, Amazon and Broadcom, to name a few.

Positive economic data and optimism that the reciprocal tariff rates would decline significantly from the initially announced figures helped fuel a rally across the board. By late June, around 80% of companies in the S&P 500 were closing above their 50-day moving average, which is about where the percentage stood in fall 2024.

You know what they say, what goes up must come down. If there’s one thing we know about stocks, it’s that a decline always follows a rally eventually, and vice versa.

Second, economic data is painting a less positive picture these days. Inflation is inching higher, job growth and consumer spending are slowing.

The tariff situation is also not yet resolved — the Aug. 1 deadline most countries faced was extended to Aug. 7 last week. Rates on imports from Mexico are still in flux as negotiations continue and China faces a separate deadline of Aug. 12 to pen a deal. Since April, the rate levels, due dates and impacted industries have changed more times than I can count, so who knows when markets will get clarity.

Maybe investors would be able to shrug off the trade war limbo if the economic data was more positive. That’s what they’ve been doing most of the summer, at least.

Third, it’s August! Yes, this just may be reason enough to send stocks lower. August and October (but we’ll focus on the former for the time being) are historically volatile months for equities.

Over the past 35 years, the S&P 500 has averaged a return of -0.6% in August, according to data from StoneX.

We just may have the perfect storm for a decline, but I’ll also note that anything can happen, and I’m not in the business of giving out investment advice.

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