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Two major Wall Street banks are saying stocks will struggle the rest of the summer

  • Bank of America Merrill Lynch portfolio strategist Cheryl Rowan said slowing earnings growth and tightening from central banks could be headwinds for stocks.
  • Technical analysts at Credit Suisse believe the S&P 500 is "attempting a correction lower" after reaching its target of 2,450/2,500.
Commuters walk through a Wall Street subway station near the New York Stock Exchange.
Michael Nagle | Bloomberg | Getty Images
Commuters walk through a Wall Street subway station near the New York Stock Exchange.

Two major Wall Street banks think it might be time to take money out of the stock market: Bank of America Merrill Lynch and Credit Suisse.

"With central banks heading toward removing liquidity, and both lofty valuations and narrow market breadth in the US, we think investors would be prudent to lock in some gains, rebalance
equities to under-owned sectors and hold above average cash," said Cheryl Rowan, portfolio strategist at Bank of America Merrill Lynch, said in a note Tuesday.

Stocks have posted stellar gains for the year already. In the time period, the S&P 500 has jumped 9 percent.

But the Federal Reserve is expected to raise rates at least once more this year, and it is prepared to shrink its $4.5 trillion bonds portfolio later in 2017.

The European Central Bank has also put out hawkish rhetoric recently. Last month, ECB president Mario Draghi said the European economy was "strengthening and broadening," adding "the threat of deflation is gone and reflationary forces are at play."

"We think the swing in global liquidity will weigh on the performance of stocks," Rowan said. She also said that a slowdown in earnings growth could be a drag for stocks this summer.

First-quarter earnings rose 15 percent year over year; second-quarter earnings are expected to have risen 6.2 percent, according to S&P Capital IQ. "While these numbers are exceptional,
particularly amid a slow growing economy, it is unlikely that coming quarterly earnings are
going to stack up well," Rowan said.

Earnings season is set to kick off Friday, with JPMorgan Chase, Citigroup and Wells Fargo scheduled to report quarterly results.

Meanwhile, technical analysts at Credit Suisse believe the S&P 500 is "attempting a correction lower" after reaching its target of 2,450/2,500.

The S&P has gone more than a year without a 5 percent correction for just the sixth time ever, according to Ryan Detrick, senior market strategist at LPL Financial.

But Credit Suisse analyst David Sneddon said rising yields in the U.S. are a potential headwind for stocks. "Higher Real Rates often lead to a higher US$," he said in a note Tuesday. "Higher US yields are also seen as a negative for US Tech."

Yields have risen sharply over the past month. in that time, the U.S. 10-year yield has jumped from around 2.12 percent to approximately 2.3 percent.

Conversely, tech stocks hit a snag before recovering some ground. Tech is the S&P's best-performing sector this year, rising nearly 20 percent.

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