Multiple market strategists are getting worried and believe all the good news could be priced in

Published Tue, Jul 6 20212:10 PM EDTUpdated Tue, Jul 6 20212:22 PM EDT

A market correction could be on its way as the economy approaches its peak, according to some of the biggest investment banks on Wall Street. Market strategists from Morgan Stanley, Goldman Sachs and Citigroup, among others, said recently that despite a booming economy with strong earnings, there's complacency in the market. That, coupled with profit-margin pressures, inflation fears, Fed tapering and taxation could contribute to an eventual drawdown, the strategists said. "The bottom line is that the US economy is booming, but this is now a known known and asset markets reflect it," Morgan Stanley strategist Michael Wilson said in a research note over the weekend. "What isn't so clear anymore is at what price this growth will accrue. Higher costs mean lower profits, another reason why the overall equity market has been narrowing. It also supports our view that equity markets are likely to take a break this summer as things heat up." Investors seemed to catch on to what has Wall Street worried midday Tuesday. Economy-related stocks like Caterpillar, Chevron and JPMorgan Chase pulled back while Big Tech stocks like Amazon, Apple and Microsoft gained. The loss put the S & P 500 on track to snap a seven-day winning streak that took the benchmark to record highs and brought the index's year-to-date gain to more than 15%. Strategists from RBC say investor optimism has faded "a bit." Covid variants are top of mind for some who don't see the pandemic as being over yet. They also don't think inflation pressures are baked in and are worried about demand destruction, according to a note out Monday. Investors also feel stocks will react to Fed tapering and rate hikes ahead of time, but strong cash deployment and economic outlooks keep them constructive, according to RBC. 'Unsettling month' Over the next six months, equity prices are more likely to decline than rise, a team of Goldman Sachs analysts said in a report . They expect the S & P 500 to finish the year at 4,300. That's slightly below where the index traded on Tuesday. The bank said gains may be limited by higher interest rates and looming tax reform. Citi analysts are also concerned about central bank policy and think that earnings reports, which will start being released in a few weeks, could fall short of expectations. They suggested July could be "an unsettling month," due to "loftier inherent expectations" following such strong first-quarter reports. The investment community is expecting even more impressive earnings outcomes, they said. However, "hurdles appear higher now than published outlooks suggest" and "one has to think that any pull-back on these levers by central banks would have share-price ramifications." Morgan Stanley's Wilson noted companies are under more pressure to pay higher wages amid a shift to fostering greater social equality that began in 2015. That has led to minimum wages in many states being up 50% or more, though when adjusted for inflation, they're down 40% from their highs in the 1960s, he said. "This suggests there's a long way to go before policy-makers are satisfied," Wilson said in the report. "Finally, globalization and the outsourcing of manufacturing and labor costs have been on a one-way track for the past 25 years. In addition to increasing political pressure to reverse course, the pandemic has exposed the outsourcing model as vulnerable when supply is less than fluid, leading many companies to rethink and reshore, which could mean higher costs."

People walk past the Federal Reserve building on March 19, 2021 in Washington, DC.

Olivier Douliery | AFP | Getty Images

A market correction could be on its way as the economy approaches its peak, according to some of the biggest investment banks on Wall Street.