A ‘significant’ stock market ‘consolidation’ may be just a few months away

Brian sozzi

The aforementioned issues do not appear to be affecting the market that continues to seek new highs. But for Deutsche Bank we are close to a consolidation in the markets that could be between -6% and -10%.

“In the very short term, we expect equities to continue to be well supported by accelerating macroeconomic growth, and we see systematic buying and repurchases to drive a routine to the upside. But we expect significant consolidation (-6% to -10%) as growth peaks over the next three months, “wrote Binky Chadha, chief strategist at the German firm, in a new research note on Tuesday.

Chadha Calls Peak ISM Data As Potential Trigger Point For Strong Market Pullback

“Our forecast for the domestic economy implies a flattening of the ISMs at high levels from the second quarter (64) and continuing into the third quarter (63). However, there are a number of considerations that suggest that the monthly ISMs reached their peak. Peak over the next three months in line with the historical inverted V pattern. We are looking for the equity positioning of discretionary investors to compare to a spike in ISMs and we do not expect retail investors to buy on the dip. Then we will see equities rally as our baseline continues to be solid growth, but only a gradual and modest rise in inflation, “explains Chadha.

Until now, Investors are barely positioned for a sizable pullback in stocks in the spring and early summer, as the economic data has been impressive.

The US economy created 916,000 jobs in March, the Bureau of Labor Statistics reported last week. That crushed Wall Street estimates of a 660,000 increase. The gain has prompted some economic forecasters to tell Yahoo Finance Live that the economy could be poised to create a million jobs a month very soon.

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Meanwhile, data from IHS Markit and the Institute for Supply Management on activity in the service sector on Monday blew the doors off analyst estimates. when the ISM activity index rose to an all-time high, as Yahoo Finance’s Myles Udland wrote in the Morning Brief newsletter. The IHS Markit reading was the best in seven years, Udland noted.

And last but not least, First quarter corporate earnings estimates have continued to trend markedly higher amid accelerating economic data.

But if economic data moderates as Chadha expects, the stock market could lose a key catalyst.