Wall Street investment banks are short on U.S. stocks

Wall Street has issued louder warning that this round of U.S. bull market is facing the test of correction.

Strategists at Goldman Sachs, Morgan Stanley and Citigroup issued their latest forecasts, arguing that a negative shock could disrupt the stock market's winning streak. The spread of the delta variance, a weak global economic recovery or the withdrawal of central bank stimulus all pose risks. Morgan Stanley downgraded its recommendation on U.S. stocks to underweight and upgraded global stocks to equal weight, citing "significant risks" to economic growth through the end of October. Meanwhile, Credit Suisse maintained a slight underweight recommendation on U.S. stocks, citing factors such as extreme valuations and regulatory risk.

The summer's rally in stocks has left investors over-inflated, vulnerable to any bad news. Investor positioning has turned extremely bullish, with the S&P 500 g longs to shorts by nearly 10 to 1 ratio. Half of those positions could face losses due to a 2.2% drop in the index. Citigroup strategists led by Chris Montagu also warned that even a small pullback could be magnified by a forced liquidation of long positions.

Technical signals also point to a possible decline for the broader market, as both momentum and volatility indicators point to overheating institutional investors, according to analysis by Bloomberg Industry Research. It remains to be seen whether future policy changes by the Fed will change retail investors' attitudes toward the stock market. "