To The Moon

Some market experts are starting to worry that this summer's rally in U.S. stocks may be starting to fade after stocks swooned from oversold to overbought.

On last Friday, the $S&P 500(.SPX)$fell 1.3%, the $NASDAQ(.IXIC)$ fell 2% on Friday, and the $DJIA(.DJI)$ fell 0.9%; the $S&P 500(.SPX)$ fell 2% , the $NASDAQ(.IXIC)$ fell 2.55%, and the $Dow Chemical(DOW)$ fell 1.91% on this Monday.

Below lists five reasons why US stock may continue to decline, cited institutions's analysis from Goldman Sachs and Citigroup:

1. Defensive Sector Started to Lead the Market

Cyclical sectors once performed well along with U.S. stocks rebounded in July and early August. But that trend appeared to come to an end last week, with defensive sectors regaining the lead. On the other hand, the two worst-performing sectors were cyclical, materials and communications services. $Materials Select Sector SPDR Fund(XLB)$ , which tracks the former, fell 2.4% last week, while $Communication Services Select Sector SPDR Fund(XLC)$ fell 3.1%.

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Goldman said,

"One sign that investors are getting nervous is that cyclicals are underperforming defensives, and we're starting to see that now,"

2. U.S. Bond Yields rose Since August

The 10-year Treasury yield has climbed 35 basis points since Aug. 1st and rose14 basis points since last Monday to now 2.897%.

Rising U.S. Treasury yields will trouble U.S. stocks because it makes bonds a relatively more attractive investment. U.S. stocks and bonds often move in unison at the start of the year, as expectations of tighter monetary policy from the Federal Reserve weigh on both assets.

Goldman and the rest of Wall Street are now waiting to see if stocks will follow bond prices decrease.

3. A Higher Dollar May Accompany a Weaker Stock Market

Rising U.S. Treasury yields and weaker inflation pushed the dollar higher, creating another potential headwind for stocks. The ICE U.S. Dollar Index topped 108 on Friday, rising to its strongest level in a month.

A strong dollar typically accompanies a weaker stock market, as a stronger dollar can adversely affect the value of U.S. multinationals' overseas profits in dollar terms.

4. Cryptocurrencies also Falling

The recent moves in cryptocurrencies such as bitcoin and ethereum have been almost in step with stocks, particularly large-cap tech stocks such as $Meta Platforms, Inc.(META)$ and $Netflix(NFLX)$ .

But cryptocurrencies fell sharply on Friday, prompting some market participants to speculate whether stocks could follow suit.

Goldman said，“Another sign of a pause in the rally in U.S. stocks is weakness in cryptocurrencies. It’s a clear sign of a risk-off trend in the market,”

5. Stock Valuations Rebound but Corporate Profit Expectations Decline

Another reason to question the U.S. stock market rally is the apparent discrepancy between stock valuations and corporate profit expectations.

As Goldman points out, the average forward price-to-earnings ratio for S&P 500 companies has rebounded to 18.6 times from a mid-June low of 15.5 times. Meanwhile, the average earnings-per-share forecast for these companies over the next 12 months fell from $238 to $230.

"Equity valuations are rising, while profit expectations are falling," Goldman said.

Citigroup U.S. equity strategist Scott Chronert also said in a recent research note to clients of the bank that the risk of a decline in public company profits as we approach 2023 could weigh on stock valuations.

"If the stock market strengthens further, a tactical rallies sell is justified," he said.

Assuming US stocks continue to fall?

Where do you think U.S. stocks will fall to support?

1.Above 3900 point?

2. Above 3600 point?

3.Below 3600 points?