Triggers for Investors: What Could Trigger a Real Market Correction as Early as This Summer

Investor sentiment is shifting more frequently—after a sell-off earlier this week, the markets turned upward as early as Thursday. Nevertheless, Alexey Golubovich, an analyst at Arbat Capital Advisory Services Limited (UK), believes that fundamental indicators suggest there is a high probability of a significant market correction. Read more in his article for Oninvest.

June on U.S. markets is putting to the test—once again—the theory that betting on growth in the tech sector driven by the AI boom is the right move. Out of 17 trading sessions since the start of the month, the Nasdaq Composite has closed in the red 10 times. Over the first five months of this year, it rose by just over 16%. In June, it lost 40% of its year-to-date gains, but this is largely due to the drop in tech stock prices following SpaceX’s IPO.

The S&P 500, more than a third of whose market capitalization is accounted for by the “Magnificent Seven,” has lost about 3% since the beginning of the month.

In addition to the decline in SpaceX shares following its IPO, the sell-off on the Nasdaq was partly driven by a slump in the South Korean market, which had previously risen by more than 100% since the beginning of 2026 (and by 250% since the beginning of 2025) due to a boom in the AI semiconductor sector and rising share prices for Samsung Electronics and SK Hynix. In the U.S., this led to doubts about the sustainability of the Nasdaq’s rally in the first half of the year, driven by AI-related companies. But as soon as U.S. semiconductor manufacturer Micron released a strong quarterly report, investor confidence in the artificial intelligence boom returned.

In my view, the pressing question right now is: what could trigger a serious and prolonged—lasting at least a month—correction in the stock markets of developed countries in 2026? I’m referring to the risk of a major stock market correction—of 10% or more—not caused by a single event, but by a combination of several factors. Such a “black swan” event is, by definition, unpredictable and difficult to forecast. But it is usually not a single event that causes a stock market crash, but rather the convergence of accumulated macroeconomic problems with an unexpected trigger.

As of mid-2026, the vulnerability of the U.S. and other developed-country markets (essentially the EU) stems from three factors.

First, the market is expensive, and value is concentrated in a small group of tech giants. The “Magnificent Seven” account for nearly 35% of the total market capitalization of the S&P 500. U.S. market multiples remain well above historical norms: the S&P 500’s P/S ratio stands at 3.63, compared to a historical average of 1.81, and its P/E ratio is 31.64, compared to an average of 16.23.

The risk associated with rapid growth lies not in the possibility that AI technology itself might fail to live up to expectations, but in the gap between the enormous costs of implementing it and the speed at which it can be monetized.

If revenue, profitability, and order growth forecasts for AI industry leaders and microchip manufacturers begin to deteriorate, the consequences could extend far beyond the technology sector and trigger not just a sector-wide sell-off (among chipmakers and beneficiaries of the AI boom), but a collapse of all indices.

Even the Fed is already talking about high stock valuations and low credit spreads: investors are receiving only a small return for the risk and will be quick to pull out of stocks.

The second factor is expectations of rising inflation and the continuation of “high” interest rates—or even their further increase. In June, the U.S. Federal Reserve kept its target range for the federal funds rate unchanged at 3.5–3.75%, with inflation at 4.2%. However, the market has not ruled out the possibility that the U.S. central bank will be forced to raise rates before the end of this year. The ECB has already raised its deposit rate to 2.25%, and the Bank of Japan has raised its rate to 1%, the highest level in 31 years.

It is now clear that the prolonged period of global “quantitative easing” has come to a halt or is being scaled back. Energy prices remaining at current levels, rising tariffs, and inflation-driven wage increases will contribute to a further rise in long-term bond yields in developed markets. This will hit growth stocks and, subsequently, the market as a whole. Even a 10% correction in the stock market will affect real estate prices and borrowing costs and will hit companies in need of refinancing.

Finally, the third factor is a synchronized slowdown in economic growth. The OECD expects GDP to grow by 2% in the U.S., 0.8% in the eurozone, 0.9% in the U.K., and 0.6% in Japan in 2026—all figures are lower than the previous year. This is not yet a recession, but growth is so weak that earnings forecasts have deteriorated—taking into account the energy and trade shocks caused by the war in the Middle East in March–June.

China’s economic growth—4.5% according to the OECD’s forecast—will not help Western countries. At the same time, Chinese investment in real estate is declining. The country’s economy remains sensitive to conditions in the real estate market and to trends in external demand. At the same time, stagnation in employment and consumer spending in the U.S. signals a weakening of one of the key markets for Chinese exports.

What could serve as a “black swan” event for the stock market, similar to an escalation in the Middle East? Other potential political triggers—a new round of U.S. tariff hikes, another wave of U.S. technology sanctions, a crisis involving Taiwan, and so on—cannot be ruled out either, though they are unlikely to occur before this fall. But if Trump and the Republicans suffer a defeat in the midterm elections this November, many things are possible.

The U.S. government debt market could also give rise to a “macro swan.” The Congressional Budget Office estimates the budget deficit in 2026 at $1.9 trillion, or 5.8% of GDP, and the debt-to-GDP ratio at 101%. A series of unsuccessful Treasury bond auctions could trigger a rise in the yield spread, and investor doubts about the U.S. government’s ability to sustain its budget could lead to a sharp increase in interest rates. Given the high leverage of a vast number of non-bank funds, this will trigger a revaluation of assets and result in forced sales.

A 10% drop, in our view, seems like a realistic scenario, but not an inevitable one. It is important to understand that if this happens, even a relatively minor event (not comparable, for example, to the start of the blockade of the Strait of Hormuz) could become a “black swan.”

The baseline forecasts of the OECD and other international institutions do not currently anticipate the onset of a global recession in 2026. Therefore, the main scenario at this time is high volatility and asset rotation among pension and investment funds, treasuries, and other market participants. The first signs of such a rotation have already appeared—according to JPMorgan estimates, institutional investors could sell up to $165 billion in stocks and use the proceeds to buy bonds by the end of this quarter, which would be the highest figure in at least four years. A combination of even just two of these three factors—an inflation shock, rising long-term interest rates, and disappointment with AI—makes a 10% or greater decline possible as early as this summer. However, a decline of, say, 20% usually requires a recession or widespread defaults.

There are already signs today that a sell-off in the U.S. may be approaching: rising yields on 10-year Treasury bonds amid rising inflation expectations, increased capital expenditures by major technology companies—which are already putting pressure on their margins and free cash flow—widening credit spreads, outflows from bond funds, and stagnation or a decline in U.S. employment and consumption.

And when bonds stop “propping up” the stock market and interest rates rise due to inflation, it’s hard to expect strong quarterly earnings. This means that one of the “black swans” could be linked to this very situation and could materialize as early as July.

This is not an investment recommendation.

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