The U.S. Bank Technology Strategy Team believes that market pressures from the Iran conflict are easing, but U.S. equities may still enter a more challenging phase this summer. In their latest client report, the team noted that the S&P 500 has shown multiple technical signs of weakening and could enter a correction phase in the third quarter.
The worst-case scenario targets 6,850.
According to Bank of America’s analysis, this correction may evolve into a “three-wave pullback,” characterized by a three-phase decline to complete the adjustment. The strategy team noted that if the S&P 500 continues to make marginal new highs and approaches 7,741, it could instead form a “bull trap,” increasing the risk of a short-term rally followed by a decline.
The weaker scenario presented by this line is that the index could decline to a low of 6,850 points during the pullback, representing approximately a 6% downside from current levels.
Three technical signals appear simultaneously
The first signal listed by Bank of America is momentum divergence. The team noted that although the index price remains at a high level, indicators reflecting upward momentum have not strengthened in tandem, suggesting that buying pressure is weakening. For example, the 14-day Relative Strength Index (RSI) has declined from its previous highs and was around 49 on Friday.
The second signal comes from the TD Sequential indicator, which is commonly used to determine whether a trend is nearing exhaustion. Bank of America noted that the S&P 500 generated a "red 13" signal on June 1, which typically suggests that the preceding upward movement is nearing exhaustion and that a consolidation or pullback is more likely to follow.
The third signal relates to Elliott Wave Theory. The strategy team suggests the market may have entered the fourth wave phase, which typically corresponds to a corrective pullback within an uptrend. The S&P 500 declined to around 7,334 on June 10, and Bank of America believes this level may represent the fourth wave low; a break below this level would further confirm that the correction has begun.
Q4 still expects a rebound
Although the bank has become more cautious about the third-quarter outlook, Bank of America has not fully turned bearish. The bank stated that if a correction occurs during the summer and early fall, the market could still regain upward momentum in the fourth quarter, potentially even seeing the year-end “Santa Claus rally” commonly observed.
Recent market skepticism about the strength of this bull cycle has grown, particularly as previously leading sectors such as chips and memory begin to cool. The Nasdaq 100 Index fell approximately 4% last week, with Broadcom down about 10%, NVIDIA down about 8%, and Intel down about 7%. This reflects growing profit-taking pressure on the core tech stocks that previously drove the index higher.