The American stock market is heading into summer in a vulnerable state. The S&P 500 remains elevated, but technical signals, according to Bank of America, point to the risk of a three-stage correction from July through September.
The base scenario from the technical strategy team suggests the index could fall to around 6,850 points. That is about 7% below recent levels. For global markets, such a pullback could be a noticeable stress, because the S&P 500 remains a key benchmark for funds, ETFs, and institutional portfolios worldwide.
The Market Has Risen, but Momentum Has Weakened
The main problem is not the fact of growth itself. The S&P 500 has climbed nearly 17% from the March low, but the strength of the move has started to wane.
Bank of America analysts point to a divergence between price and momentum indicators. The index is not far from its highs, but the 14-day RSI has already dropped to about 49. This means the market is not rising as confidently as before.
Such divergence often serves as a warning. The price may still set a new high, but underlying demand is already weaker.
A Bull Trap Scenario Is Possible
According to Bank of America Head of Technical Strategy Paul Ciana, a new local high around 7,741 points could turn out to be a trap for buyers.
The idea is simple. The market may first show another upward surge, attract late buyers, and then move into a deeper correction. In technical analysis, this scenario often looks especially unpleasant: outwardly the trend is still alive, but the structure of the move is already breaking down.
BofA describes the possible pullback as a three-wave pattern. First, the index falls, then bounces, after which it heads down again. It is the final phase that could be the most painful for those who bought at the top.
Tech Stocks Have Become a Weak Spot
The risk is heightened by the structure of the rally itself. This year, the growth of the U.S. market has again relied on a limited group of large tech companies.
When a few giants pull the index up, it becomes less stable. If leadership starts to break down, the broader market finds it harder to offset the drop.
This is already visible in the Nasdaq’s performance. The tech index has fallen more than the S&P 500 over the past month, losing nearly 5%. Semiconductors and memory stocks have been hit: Broadcom dropped about 10%, Nvidia 8%, Intel 7%.
A Narrow Market Falls Sharper
Concentration in large tech companies does not mean a correction is inevitable. But it does make the market more sensitive to negative signals.
When growth is broadly distributed, weakness in one sector can be smoothed out by other groups of stocks. Now the situation is different. If investors start cutting tech positions, the index quickly loses support.
That is why even a technical pullback of 5–7% can feel stronger than usual. Especially if it coincides with seasonally low summer liquidity.
The Fed Is Not Helping Buyers
The backdrop for stocks is also complicated by monetary policy. The Fed, led by Kevin Warsh, kept rates unchanged, but hawkish rhetoric increased investor caution.
High rates weigh on company valuations, especially those whose value is based on future profits. For the tech sector, this is especially important: the higher the discount rate, the harder it is to justify expensive multiples.
An additional risk is inflation. Rising oil prices earlier this year have already put pressure on expectations. If the Fed turns more hawkish again, the market could quickly shift from calm consolidation to a sell-off.
Geopolitics Remains a Background Risk
The market also cannot fully ignore geopolitics. Tensions around the U.S.-Iran conflict have eased, but not disappeared.
Even if it is not the main factor for the index, it adds a risk premium. In a weak technical market, such events can amplify moves, especially when investors are already ready to cut positions.
In other words, the market does not necessarily need a single major shock. Sometimes a combination of expensive valuations, weak momentum, a hawkish Fed, and narrow leadership is enough.
This Is Not a Recession Forecast
It is important that Bank of America’s warning is not a prediction of an economic crash. It is specifically about a technical correction.
Such pullbacks often occur even as the economy continues to grow. The market may be overheated, too concentrated, or simply need a breather after a strong upward move.
So the main question is not whether a new bear market has started. The question is the depth and duration of the correction. If company earnings are strong and macro data is calm, the decline may become a normal consolidation phase.
Earnings Will Decide Much
The upcoming corporate earnings season will be a key test. If companies confirm profit growth, the market will have a case for recovery.
If forecasts fall short of expectations, the technical picture could quickly deteriorate. It is especially dangerous if the pressure comes from the same tech giants that pulled the index up.
Right now, investors are essentially waiting for confirmation: was the summer pullback a healthy pause or the start of a longer decline?
Why This Matters for Global Markets
The S&P 500 is not just an American index. It is embedded in a huge number of passive strategies, pension portfolios, and ETFs around the world.
If the U.S. market enters a correction, the pressure quickly spreads to other venues. London, Tokyo, emerging markets, commodities, and corporate credit may react through reduced risk appetite.
In summer, this effect is often stronger. Trading volumes are lower, liquidity is thinner, and moves on negative news become sharper.
Investors May Start to Change Portfolio Structure
If S&P 500 weakness drags on, funds may start to reduce the weight of expensive tech stocks and reallocate capital to other segments.
Possible directions include value stocks, international markets, and small companies. Some managers already say that large tech stocks should be held with a lower weight.
This does not mean Big Tech is losing its significance. But the market is trying to figure out who will become the new leader if the previous group stops pulling the index up.
The Fourth Quarter Could Still Be Strong
The Bank of America team does not believe the bull market will necessarily end in the third quarter. Moreover, the bank’s scenario still allows for a recovery in the fourth quarter.
Historically, the end of the year is often strong for stocks if the economy does not sharply slow and company profits remain resilient.
But there is a more unpleasant option: the correction could drag on until October and form a double top. Then the market would spend more time moving sideways or downward before choosing a direction again.
What to Watch Next
One important event will be Fed Chair Kevin Warsh’s speech at the ECB forum in Sintra. Any signals on rates and inflation could affect the depth of the correction.
Economic data and earnings season are also important. If they confirm steady growth, the market could quickly stabilize. If not, BofA’s technical scenario will gain more weight.
The main risk zone is the combination of weak momentum and bad fundamental news. That is what can turn a normal pullback into a more painful sell-off.
What Next?
The S&P 500 enters summer with strong gains behind it, but with a weaker internal picture. The index may still set a new high, but Bank of America warns: such a surge could be the last before a correction.
For investors, the main takeaway is simple. The market does not yet look broken, but it has become more fragile. Narrow tech leadership, a hawkish Fed, low summer liquidity, and weak momentum create conditions for a three-wave decline. If the S&P 500 really heads to 6,850 points, the pressure will be felt not only in the U.S. but also in global markets.
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