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The summer's market rally is due to run out of steam as earnings look set to disappoint yet again and retail investors continue to shun the most hated bull in history, strategists told CNBC on Wednesday.
Second-quarter corporate earnings reports point to a fourth-straight quarter of year-over-year profit declines for companies, and estimates for the third-quarter now see earnings down marginally. Meanwhile, the S&P has hit a number of new highs this summer.
U.S. stock prices have gotten ahead of themselves, Deutsche Bank Chief U.S. Equity Strategist David Bianco said.
"I think when we get to September and October and we look back at the summer, we're going say that was kind of silly. I think the market is still facing some pretty significant challenges," he told CNBC's "Squawk Box."
Bianco expects third-quarter earnings will be down roughly 1 percent from a year earlier as the energy sector struggles to turn a profit amid renewed pressure on crude prices.
Second-quarter earnings per share were down 2.6 percent through Monday, with nearly 90 percent of S&P companies having reported, according to Thomson Reuters I/B/E/S. Excluding the energy sector, they were 1.8 percent higher.
The sector's lack of profitability will continue to weigh on overall S&P earnings, Bianco said. Further, weak capital spending and excess capacity in commodities, global manufacturing and property development will create drag, he added.
Banks also will remain challenged as bond-buying by central banks suppresses interest rates, according to Bianco. Lower rates make it harder for banks to make money on plain vanilla business like lending money.
"I think the earnings situation is still weak. I don't think we get to better profits until Q4 or 2017," Bianco said.
Kristina Hooper, U.S. investment strategist at Allianz Global Investors, said the summer's rally has been "unusual" and was generated largely by the Brexit vote and assumptions about the Federal Reserve's reaction.
"There was this excitement, I think, among market participants that this would force the Fed's hand to be more accommodative, and as a result, I would argue this is not a fundamentals-based rally. So it's one that has vulnerability," she told "Squawk Box."
A more accommodative Fed would keep interest rates lower, pushing investors into stocks to find returns. But while the U.S. stock market is the "least bad alternative" for investors, the nature of the rally makes it vulnerable to external shocks, Hooper said.
One hallmark of the six-year bull rally that persists today is a lack of participation from small retail investors, said Scott Wren, senior global equity strategist at Wells Fargo Investment Institute.
"Many of them have sat on their hands for literally six years. There's nobody chasing this market. There's lots of nonbelievers out here, and the market just keeps going up," he told "Squawk on the Street."
Larry McDonald, managing director at ACG Analytics, said the only strategy that has worked for retail investors for the last two years has been buying fear.
"The problem is, since 2013, if you chase rallies, the Fed has burned the small investor over and over again," he told "Squawk on the Street."
That's because the Federal Reserve keeps talking up a rate hike, causing the dollar to strengthen and oil prices to weaken, raising risk, and eventually flushing investors into risk-off plays, he said.
While the Fed is unlikely to pull off a second rate hike this year following an initial quarter-point increase December, policymakers will nevertheless attempt to prepare the market for one, McDonald said.
"That's a big deal because the rest of the world is obviously easing," he said.