MW Stocks are sinking, and these 4 charts suggest a deeper drop might be just getting started

By Joseph Adinolfi

Valuations returned to nosebleed territory ahead of the seasonally weakest period for stock-market returns

U.S. stocks have stumbled since the start of August, and a number of Wall Street strategists are warning that this might be just a taste of a deeper selloff ahead.

For example, Julian Emanuel, chief equity and quantitative strategist at Evercore ISI, said in a report shared with MarketWatch that he is expecting a pullback of between 7% to 15% by mid-October. Strategists at Deutsche Bank have also warned that stocks are likely due for some weakness here, although they expected a more modest retreat.

There are some silver linings. Emanuel said the longer-term bull market probably isn't in jeopardy, and that a deeper pullback would ultimately invite dip buyers to do their thing.

The strategist has advised against dumping stocks. Some investors might want to consider purchasing hedges to guard their portfolios against any near-term weakness, he said.

But as major U.S. equity indexes again finished in the red on Tuesday, here are a few charts investors might want to keep in mind.

Valuations are back to nosebleed levels

The cyclically adjusted price-to-earnings ratio, developed by Yale economist Robert Shiller, topped 38 in late July.

At that level, the gauge - better known as the CAPE ratio - showed the S&P 500 had reached its priciest point since late 2021.

Soon after that previous peak, stocks and bonds alike were pummeled as the Federal Reserve embarked on its most aggressive campaign of interest-rate hikes in decades. The S&P 500 would go on to tally its worst calendar-year showing since 2008, FactSet data showed.

Emanuel isn't expecting a repeat of 2022. But high valuations leave stocks vulnerable to disappointing news, he said.

Seasonal weakness likely lies ahead

The two-month stretch between early August and early October is typically the weakest of the entire calendar year for stocks, according to BTIG's Jonathan Krinsky.

September tends to be particularly rough. The S&P 500 has, on average, fallen by 1.1% during the month going back to 1928, according to Dow Jones Market Data.

Recent economic reports, including Friday's dismal jobs report for July, have underscored signs of weakness in the labor market. A disappointing reading on the ISM services index for July added to investors' fears of an economic slowdown on Tuesday.

The S&P 500 enters overbought territory

One popular stock-market momentum gauge has come off the boil after catapulting into overbought territory last month.

The 14-day relative-strength index for the S&P 500 topped 76 on July 28, its highest reading since July 2024. Shortly afterward, a selloff began that sent the index skittering to the edge of a correction.

Any reading above 70 is generally considered overbought. A correction is typically defined as a drop of 10% or more.

Although the RSI has retreated from these highs, Mark Hackett, chief market strategist at Nationwide, said in emailed commentary that it remained just shy of overbought territory. That might mean the latest pullback is just getting started.

Wall Street's 'fear gauge' is climbing

After touching its lowest level since January last month, the Cboe Volatility Index, known as the VIX or Wall Street's "fear gauge," has started to pick up once again.

Evercore ISI's Emanuel said the index was likely overdue for a bout of mean reversion.

The index jumped above 20 for the first time since June on Friday. It finished at 17.87 on Tuesday. Meanwhile, major U.S. equity indexes finished lower, with the S&P 500, Nasdaq Composite COMP and Dow Jones Industrial Average DJIA all finishing in the red.

Ken Jimenez contributed.

-Joseph Adinolfi

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

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August 05, 2025 16:49 ET (20:49 GMT)

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