A 'significant' stock market 'consolidation' may only be months away: Deutsche Bank

Nothing has been able to shake the new bull market in recent weeks — not a still elevated 10-year Treasury yield or threats of higher taxes on the wealthy and corporations by the Biden administration.

But the one thing that has powered the S&P 500 beyond a record 4,000 — data that indicates a strong post COVID-19 economic recovery is rapidly building — may turn out to ruin the rally. And it could play out within three months, warns widely followed Deutsche Bank Chief Strategist Binky Chadha.

"Very near term, we expect equities to continue to be well supported by the acceleration in macro growth, and see buying by systematic strategies and buybacks driving a grind higher. But we expect a significant consolidation (-6% to -10%) as growth peaks over the next three months," Chadha wrote in a new research note on Tuesday.

Chadha calls out peaking ISM data — which has been coming in hot of late — as the potential trigger point for a steep market pullback.

"Our house economics forecast implies a flattening out of the ISMs at elevated levels beginning in Q2 (64) and continuing into Q3 (63). There are a number of considerations though that suggest the monthly ISMs peak more sharply over the next three months and slow in keeping with the historical inverted-V shaped pattern. We look for discretionary investor equity positioning to be pared with a peak in the ISMs and do not expect retail to buy the dip. We then see equities rallying back as our baseline remains for strong growth but only a gradual and modest rise in inflation," explains Chadha.

Thus far, investors are hardly positioned for any sizable spring/early summer swoon in stocks — with good reason as the economic data has been impressive.

The U.S. economy created 916,000 jobs in March, the Bureau of Labor Statistics reported last week. That crushed Wall Street estimates for a 660,000 increase. The gain has some economic forecasters telling Yahoo Finance Live the economy could be on the verge of creating a million jobs a month very soon.

A hiring sign shows in Wheeling, Ill., Sunday, March 21, 2021. America’s employers unleashed a burst of hiring in March, adding 916,000 jobs in a sign that a sustained recovery from the pandemic recession is taking hold as vaccinations accelerate, stimulus checks flow through the economy and businesses increasingly reopen. (AP Photo/Nam Y. Huh) (ASSOCIATED PRESS)

Meanwhile, data from IHS Markit and the Institute for Supply Management on activity in the services sector on Monday blew the doors off analyst estimates as the ISM's activity index surged to a record high, as Yahoo Finance's Myles Udland wrote in the Morning Brief newsletter. IHS Markit's reading was the best in seven years, noted Udland.

And last but not least, corporate profit estimates for the first quarter have continued to trend noticeably higher amid the acceleration in economic data.

But if economic data moderates as Chadha expects, the stock market could lose a key catalyst. That's not lost by Chadha's peers on Wall Street.

"Our view coming into 2021 was that earnings will drive markets higher and valuations will take a backseat, and actually be flat to down for the year. But the good news is actually starting to get priced in here, and we think it's going to become more challenging for investors and trickier," said Saira Malik, global equities chief investment officer and global portfolio manager at Nuveen, on Yahoo Finance Live.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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