As one of the most eventful macroeconomic weeks of the year begins, U.S. equity markets are climbing as if the storm clouds don’t exist. Are investors running headfirst into the next correction?

Despite a looming trifecta of economic and policy risks, the S&P 500 (SPX) notched five consecutive record highs last week, with futures signaling further upside as the new trading week begins. The rally comes just days ahead of three potentially market-moving events: the Federal Reserve’s rate decision on Wednesday, Q2 GDP data on Thursday, and July’s non-farm payrolls report on Friday.

This convergence of critical data points poses a clear risk narrative for markets. Yet investors are pressing the gas pedal, buoyed by earnings optimism and momentum-driven flows. It’s a setup that feels more euphoric than rational.

Too Much Faith in Tech Earnings? A Veteran Manager Sounds the Alarm

Mark Ellis, Chief Investment Officer at UK-based fund Nutshell Asset Management, warns that traders are overconfident. His firm, which manages approximately £259 million (around $347 million) and is backed by billionaire ICAP founder Michael Spencer, is positioning more defensively heading into August.

According to Ellis, expectations for this week’s earnings from tech titans like Microsoft, Amazon, and Meta Platforms are overly optimistic. “Markets are trading on narrative and momentum rather than data,” he noted, revealing that he has trimmed his Microsoft holdings and exited his Meta position entirely.

Ellis is not alone. Several institutional strategists have voiced concern that if the Fed delivers a more hawkish tone while GDP or jobs data disappoint, tech-heavy indices could face a sharp, sentiment-driven pullback.

The Hidden Fall Risk Behind the Rally: When Psychology Drives the Market

Underneath the bullish headlines lies a classic behavioral trap: FOMO – fear of missing out. Retail traders and hedge funds alike are chasing performance, driven less by fundamentals and more by the emotional fear of underperformance.

This kind of psychology tends to drive exaggerated uptrends—until they break. Historically, similar setups have preceded sharp corrections: February 2020, September 2022, and August 2015 all followed periods of euphoric buying just before volatility returned with force.

When markets ignore risk, the eventual repricing is rarely gentle.

A Hawkish Fed and Historical Weakness Could Be a Toxic Mix

Institutional desks are increasingly concerned that this week could serve as a turning point. Should the Fed lean hawkish—signaling “higher for longer” rates—while GDP growth lags and payrolls soften, the combination could trigger a swift derating in tech stocks.

Ellis warned of the “momentum trap” in hedge fund strategies, where repeated buying of market leaders creates fragile uptrends. “When momentum breaks, you get a sharp snapback,” he said, highlighting that many quant-driven funds are currently long mega-cap tech across the board.

Adding to the concern, August and September have historically been the worst months for risk-adjusted equity returns—as measured by Sharpe ratios—for the S&P 500 over the past five decades. That historical context is now clashing with a market behaving as if seasonality no longer matters.

Institutions Say: It’s Time to De-Risk

For many institutional investors, late July is the start of the summer repositioning window. Even if tech earnings beat expectations, macro headwinds are growing louder: sticky inflation, slowing global demand, and geopolitical uncertainty are all flashing warning signs.

Several buy-side desks are already reducing risk, particularly in tech, by trimming positions, raising cash, and buying downside protection through put options. Others are flagging stretched valuations and extreme positioning in call options—a setup vulnerable to even mild disappointments.

The recent uptick in volatility measures, paired with thin summer liquidity, increases the potential for outsized reactions to any surprise—whether in the Fed’s language, in the jobs data, or in earnings misses.

Bottom Line: Market Optimism vs. Economic Reality

The disconnect between investor sentiment and underlying economic risks is growing more pronounced by the day. Markets may be ignoring the memo, but macro reality could soon force them to catch up.

If the Fed signals no near-term rate cuts, while economic data prints on the weak side, the S&P 500’s current trajectory could stall—or reverse outright. That scenario is especially dangerous for names boosted primarily by momentum and passive flows.

For prudent investors, the message is clear: take some chips off the table. The calendar, the Fed, and fundamentals are all aligning for a potentially volatile August. History doesn’t always repeat—but in markets, it often rhymes.