Deutsche Bank's global CIO believes US stocks ripe for a 10% drop

US stocks haven’t shown many signs of a slowdown lately. The S&P 500 and Nasdaq 100 both closed at all-time highs on Tuesday. Equity investors have largely shrugged off caution by Federal Reserve officials that their expectations of interest-rate cuts are too premature and confident.

Swap contracts tied to the Fed’s meetings at the moment price in as many as six cuts for 2024, with the first reduction projected in May. Nolting — who correctly predicted no cuts at all by the Fed last year — expects to see only three.

Deutsche Bank isn’t alone in questioning the endurance of the US stock market rally. Citigroup Inc. warns that Nasdaq 100 futures positioning is near the highest in three years, with investors appearing to favor growth stocks into the earnings season.

“Profit levels, in particular for Nasdaq, are the growing concern, with positioning and profits extended,” a team of Citi quantitative strategists led by Chris Montagu wrote in a note. “The average long position is near 5% in profit, elevating the risk of profit-taking unwinds and creating a potential headwind for a continued rally in the near term.”

Still, there are plenty of believers in the rally’s staying power. Options traders have been betting on further gains by the S&P 500. Strategists tracked by Bloomberg have a median forecast of 4,950 for year-end, implying about a 2% advance from current levels.

Investors will get more clues as to the strength of US economy with the fourth-quarter gross-domestic-product data due on Thursday and the Fed’s preferred gauge of inflation on Friday.

Deutsche Bank, meanwhile, forecasts the stock-market slowdown will hit after the current earnings season ends — but sees it bringing a potentially useful entry point as well.

“The good news for us is that we think even if there’s a recession in the US, it’s a small or short one,” Nolting said. “If there’s volatility coming up in the market, that’s an opportunity then to buy the market for us.”

On China, where shares have rallied this week as authorities announced new support measures, Nolting is taking a wait-and-see approach.

“To really add to the portfolios again, I want to see flows into China,” he said. “Just being cheap is not a reason for a market to perform.”