Wall Street banks see a painful summer for stocks ahead

If you gathered a group of stock analysts in a room, odds are each analysts would have a different view on the market.

So when analysts from three big investment banks are on the same page, it might pay to listen.

Bank of America Merrill Lynch, Goldman Sachs and J.P. Morgan are all urging investors to rotate out of equities because they see a painful summer ahead.

“An increasing number of trends worry us as we head into summer,” said Savita Subramanian, an equity and quantitative strategist at Bank of America Merrill Lynch.

The fact that corporate buybacks are near an all-time high while the number of companies projected to post losses has also risen is a huge red flag for Subramanian.

Furthermore, an interest-rate hike during an earnings recession never ends well, she said.

“Since 1971, the Fed has begun tightening during a bona fide profits recession only three other times – 1976, 1983, and 1986; two out of those three instances saw stocks drop over the next twelve months. The S&P is just 1% off its Dec. 16 level when the Fed initially hiked,” said the strategist in a report.

An earnings recession, like an economic contraction, is two consecutive quarters of negative year-on-year profit growth. First-quarter earnings fell 7.1% from a year earlier, marking four consecutive quarters of declines, according to FactSet.

Subramanian also sees signs that capital is drying up with initial public offerings at an all-time low while commercial lending standards have tightened.

Meanwhile, oil prices, despite the recent rebound, are likely to weaken again and fall more than 15% before bouncing back. June WTI oil CLM6, +0.61% rallied 3.3% to settle at $47.72 a barrel, its highest settlement since Nov. 3.

And to top it all off, investors must contend with risks associated with an election year.

“As we move closer to November with many policy unknowns for both presumptive nominees Trump and Clinton, uncertainty is likely to be even higher than it is ahead of the average election,” she said.

Goldman Sachs is likewise bearish on stocks.

“S&P 500 will likely experience at least one drawdown between now and year-end. We recommend selling upside calls to fund downside protection,” said David Kostin, chief U.S. strategist at Goldman Sachs, in his weekly note.

Kostin identified several known risks for the market which are listed below.

•Elevated valuation: S&P 500’s SPX, +0.98% forward price-to-earnings ratio is at 16.7 which ranks in the 86th percentile over the past 40 years.

•Waning buybacks: Corporate stock buybacks typically taper off in June and July.

•The Fed: The market is projecting one interest rate hike this year while Goldman Sachs economists see two rate increases.

•Imported risk: Slower growth in China could revive fears about a recession in the U.S.

•U.S. presidential election: The market is not paying enough attention to the closeness of the race. “The upcoming party conventions will almost assuredly raise political uncertainty and weigh on equity valuations,” Kostin said.

J.P. Morgan has also jumped on the “sell in May” bandwagon.

Mislav Matejka, an equity strategist at J.P. Morgan, believes the rewards are not worth the risk and urged investors to reduce exposure to stocks.

One key reason for his pessimism is that the Citigroup Economic Surprise Index—which tracks economic data beats and misses—has fallen sharply in recent weeks, which precludes a rally in the market.

“The February-March rebound in equities was accompanied by a pickup in U.S. CESI. In contrast, in the last few weeks the U.S. CESI has rolled over again, opening a gap with S&P 500,” said Matejka.

The strategist also expects the U.S. dollar DXY, -0.01% to begin strengthening against soon, which could weigh on earnings while the bulk of accommodative policies from central banks are now in the past.

At the same time, China continues to fuel global uncertainties as its economy appears to be growing more immune to stimulus measures which in turn will depress commodities.

Based on the trio of market bears, “sell in May and go away” may not be such a bad idea this year.

Wall Street banks see a painful summer for stocks ahead