Significant market correction possible in the short term

Investment strategist Vincenzo Vedda of DWS anticipates a stock market correction in the foreseeable future. According to him, risk premiums on both stocks and bonds are so low that even a minor setback could cause stock market sentiment to shift.

US stocks have shown an impressive recovery in recent weeks, catching up with the rise in European stocks this year. “This positive momentum could continue for a while, provided no new unpleasant surprises arise,” says Vincenzo Vedda.

The investment strategist at asset manager DWS seriously considers that a significant market correction could occur in the short term because the existing risk factors have by no means disappeared. He cites President Trump's Big Beautiful Bill, which will further inflate the US budget deficit, causing long-term interest rates to rise again.

He also believes that import tariffs continue to hang like a dark cloud over the market. These could fuel inflation or, conversely, temper it, depending on their impact on economic growth.

Small setbacks, large impact

In this unstable and highly confusing situation, risk premiums on both equities and corporate bonds are surprisingly low. “Even minor setbacks could therefore push the market into another correction,” warns Vedda. On the other hand, if the half-yearly results season turns out to be better than expected, for example, a correction may not occur.

The investment strategist himself believes that earnings expectations for the second quarter will be further revised downward, with the exception of technology and financial companies. “In these circumstances, we continue to recommend a broadly diversified portfolio.”

Higher wages push up inflation

Import duties, tax cuts, and stricter immigration laws, which are likely to increase wage pressure, could fuel inflation in the US. The Fed will therefore remain cautious and will not lower interest rates before this fall. “However, we do foresee four interest rate cuts by mid-2026,” says Vedda.

Investors in euros should keep a close eye on the dollar. “Due to the decline in the value of the dollar, the positive returns on US stocks have almost completely evaporated to zero, calculated in euros.”

Technical signal

In more ‘technical’ insights, the gap is narrowing between the percentage of overbought and oversold stocks in the S&P 500 — a sign of growing indecision under the surface. Markets may be near a turning point as positioning becomes more balanced. One to watch.

Sources: iexprofs, Roberto Junior, Bespoke