BofA warned of the risk of a "three-wave correction" in the S&P 500 in the coming months

Investors should hedge against any further gains in the S&P 500 and prepare for a potential “three-wave correction” in the index over the next few months, warned Paul Chiana, head of technical research at Bank of America (BofA), according to Bloomberg. Paul, the analyst, estimates that during this period, the S&P 500 could fall to 6,850 points—that is, by about 8% from current levels and 10% from its high (just above 7,600 points). In trading on June 29, the S&P 500 rose by just over 1% from the previous close—and closed at 7,440.43 points.

Since its March lows—which the S&P 500 hit amid the war in the Middle East—the broad U.S. stock index has already gained nearly 17%, however, after reaching a peak on June 2, the rally “became more volatile, and the risks of a correction increased,” Chiana noted. He attributed his view, among other things, to “excessive” price momentum and deteriorating growth momentum. All of this, according to the analyst, should justify a “defensive stance” by market participants from July through September.

"The summer scenario is a three-wave correction," Chiana wrote, warning of the risk that this negative trend could persist longer—until October.

BofA strategists began advising market participants to “take profits” on U.S. stocks as early as the beginning of June, Bloomberg notes: At the time, they noted that the market was showing “too many warning signs” and warned that even if the S&P 500 hit a new high, it could turn out to be a false signal.

The agency notes, however, that Bank of America’s forecast differs from the expectations of many Wall Street analysts. A week earlier, strategists at Societe Generale raised their year-end target for the S&P 500 to 8,000 points from 7,300.

JPMorgan also raised its target for the S&P 500 to 7,800 last week and stated that U.S. stocks are approaching the most favorable “blue-sky” scenario — thanks to corporate earnings growth driven by investments in AI and the resilience of the U.S. economy. At the same time, the bank warned of the risk of sharp short-term crashes (sudden drops in asset prices, which are usually followed by a rebound). According to analysts, such dynamics can be expected due to the overheating of speculative stocks in the AI sector, a possible increase in the supply of shares, and the Fed’s tightening of monetary policy.

This article was AI-translated and verified by a human editor