Citigroup's stocks strategist Scott Chronert said that US stocks may be heading for a "summer storm", listing a series of reasons why the market may face a correction during this relatively calm period in history.

Kroner still expects the S&P 500 index (SPX) to reach or come close to his target price of 5600 points by the end of this year. He first proposed this target in June, when Wall Street was trying to keep up with the continuously rising index. But in his latest report on Friday, Kroner said he expects some bumps along the way.

The current valuation of US stocks is still relatively high compared to historical levels, which is the top potential instability factor listed by Kroner. Citigroup analysis shows that overvaluation typically hinders future returns.

The expected price-to-earnings ratio (measuring how much investors are willing to pay for each dollar of expected earnings in the coming year) for the S&P 500 index is currently 21.1, in the 90th percentile of the past 40 years. Citigroup data shows that the valuation of the index over the past 12 months has been even higher. In the past, when the valuation was so high, the median expected return on the index for the next year was -4%.

So far, the high valuations have not dampened investors' enthusiasm for US stocks. On the contrary, a measure of investor sentiment frequently used by Citigroup analysts shows optimism, while the CBOE volatility index (also known as the widely known VIX index or Wall Street's 'panic index') hovers near its lowest level since 2019. This suggests that if negative catalysts emerge, the market may experience violent fluctuations.

Kroner believes there may be many potential threats in the future. Some prominent threats listed by him include the upcoming 2024 US election, the risk of inflation data once again exceeding expectations, and geopolitical concerns, which triggered a brief sell-off in the stock market earlier this year.

In Kroner's view, the only positive factor supporting further gains in the stock market is the expectation that the earnings of S&P 500 index component companies will continue to grow strongly.

As Citigroup Group released a cautious outlook, investors are about to usher in the strongest period in the history of US stocks on Monday. According to Goldman Sachs analysis, the S&P 500 index usually rises more than 2% in the first two weeks of July.

But beyond that, things are starting to get more dangerous. According to Callie Cox, chief market strategist at Ritholtz Wealth Management, the S&P 500 index typically experiences seven single-day declines of 1% or more in the summer months over the past 50 years. Since April of this year, the index has not fallen this much, indicating that the recent market has been very calm.

If the index can hold on to Labor Day (the first Monday in September) and not experience a callback of at least this magnitude, it will be the calmest summer in the stock market since 1979. Cox said that low trading volume often exacerbates volatility in the summer stock market.

He said that although investors tend to take vacations in the summer, news that may affect the market's trend will not pause. During the period from July 1 to September, the market will need to deal with two employment reports, several inflation reports, the Federal Reserve's interest rate decisions, and an earnings season that may be difficult to meet the increasingly high standards of Wall Street.

People's concerns about the upcoming presidential election and economic data are also increasing. Recent economic data shows that the US economy is cooling.

According to FactSet data, major US stock indices started strong in July, with the S&P 500 index rising 0.1% on Monday to close at 5475 points. The Nasdaq Composite Index (IXIC) rose 0.8%. The Dow Jones Industrial Average (DJIA) rose 0.1%, while the small-cap Russell 2000 index (RUT) fell 0.8%.