Wall Street is sounding the alarm! Is the negative news piling up in the US stock market, leading to deeper and deeper declines?

Zhitong Finance learned that Citigroup strategists stated that as investors sell off a large number of long futures positions, any further weakness in the US stock market could be exacerbated. The S&P 500 index has $52 billion in long positions, with 88% of them in a loss-making state. Citigroup strategist Chris Montagu believes this is the risk the market is facing.

Due to concerns about the Middle East tensions and interest rate trends, the US benchmark index has fallen by 2.6% in the past two trading days. In a report, he wrote, "The liquidation of long positions in the S&P 500 index is mainly profit-taking trades, but the remaining long positions are now on average at a loss of 0.8%. If the market turns bearish, the trend may be faster and larger, as a large number of long positions are already in a loss-making state."

US stocks face two major unfavorable factors: cooling expectations of interest rate cuts, geopolitical risks

After the US released higher-than-expected inflation and retail data, the market reduced the likelihood of a Fed rate cut. Previously released data showed that the US core CPI rose by 0.4% month-on-month in March, exceeding economists' general expectation of 0.3%; the year-on-year growth rate remained stable at 3.8%, the same as last month, and this indicator has exceeded economists' general expectations for three consecutive months. At the same time, US retail sales in March rose by 0.7% month-on-month, exceeding the market's expectation of 0.3%, reaching a new high since September last year, and the previous value was revised up from 0.6% to 0.9%.

The core inflation index, which measures basic inflation in the US, has exceeded expectations for three consecutive months, indicating that a new round of consumer price pressure and inflation stickiness seem to be spreading to all corners of the US economy. Retail data shows that as long as a strong labor market supports household consumption demand, inflation may be entrenched, further delaying the Fed's rate cut action.

On Monday, after the retail sales data was released, US Treasury yields hit a new high for the year, with the 10-year US Treasury yield rising by 11.9 basis points to 4.618% on the day, the highest level since November 14 last year; the 2-year US Treasury yield rose by 11.1 basis points to 4.993% on the day Morgan Stanley strategist Mislav Matejka said that the stock market has underestimated the impact of rising inflation on the Federal Reserve's policy and bond yields. He said: "Although some of the changes in yields may be due to optimistic growth prospects, we believe that most of it is being driven by sticky inflation. Risks of interest rates soaring for 'wrong reasons,' a complete reversal of the Fed's policy focus, and continued overheating of inflation are all on the rise."

Morgan Stanley strategist Michael Wilson also issued a warning about the impact of higher rates on stock valuations. He expects that as the yield on the U.S. 10-year Treasury note rises above 4.4%, the stock market will show greater sensitivity to rates. Wilson stated: "On the surface, as the market becomes more selective about quality and earnings power, valuation dispersion is increasing. The market's reaction during earnings season may show how much risk there is in valuations."

After an unprecedented attack on Israel by Iran, geopolitical tensions have escalated, adding to market volatility. Montagu mentioned geopolitical risks, stating: "Fund flows indicate that most market investors have been reducing risk before the increase in uncertainty. The remaining long positions have seen slight losses, and this positioning may amplify any negative market reactions."

Beware of "Earnings Kill"! JP Morgan and Citigroup issue warnings

Moreover, currently, the "life-saving straw" that often saves the rise of U.S. stocks—quarterly earnings reports—also carries risks. JP Morgan warned that the market is too optimistic about earnings season. So far, the performance of companies that have reported earnings has been mixed. JP Morgan strategist warned not to expect optimistic corporate earnings reports to drive the U.S. stock market higher, as most of the optimism has already been priced in after this year's record rally. Matejka stated that half of the U.S. companies that have reported earnings so far have underperformed the market on the day of the announcement.

The research team led by Matejka at Morgan Stanley stated that profit expectations for the first quarter have been lowered, reducing the threshold for U.S. companies to exceed expectations. Strategists said that excluding tech giants, earnings for S&P 500 index component companies are expected to decline across the board.

Matejka said that at the same time, investor positions appear "very tense." Due to optimism about the resilience of the U.S. economy and falling interest rates, the U.S. benchmark index has reached record highs. He said: "The stock market has performed well, indicating that investors are more optimistic than the bearish profit forecasts conveyed by sell-side analysts." "We need to see a clear acceleration in profits to prove that the current stock valuation is reasonable, and we are concerned that this may not be achieved."

Citi previously pointed out that the performance of semiconductor stocks will be "mediocre." With chip stocks attracting attention after a strong rally, Citi analysts Christopher Danely and Kelsey Chia expect that the profit outlook for U.S. semiconductor companies will be even more bleak this time. They believe that the key indicator of the semiconductor market, AMD (AMD.US), will not improve its AI revenue forecast until this summer