The curse of "good news is bad news" reappears! The Citigroup Economic Surprise Index breaks through 40, and the US stock market may face the law of "three weeks of decline, three months of recovery".

The US economy is showing unexpected resilience - strong labor market, stable retail sales, and regional manufacturing revival. However, for US stock investors, these "good news" are turning into real "bad news". Leuthold Group's latest research reveals an unsettling market pattern: when the Citi US Economic Surprises Index breaks through the key threshold of 40, the S&P 500 index often records negative returns in the next three weeks, taking an average of three months to recover. Currently, the index is at a high of 50.3 - the curse of "good news turning into bad news" is replaying on Wall Street. Historical pattern: 28 verifications of the "three-week curse" Since Citi Group introduced the Economic Surprises Index in 2003, data tracked by Leuthold Group shows that every time the "Main Street economy" indicator reaches 40 or above, the S&P 500 index records negative returns in the following 21 trading days. Each time, it takes an average of three months for the market to recover from these losses. Chun Wang, Director of Multi-Asset Strategies at Leuthold, said, "We have indeed noticed the change in market dynamics, especially in the past two or three months, when positive news often accompanies weak stock market performance." This situation of "good news turning into bad news" is the result of various forces intertwining. Iran War: Breaking the historical pattern with "extra noise" Wang specifically pointed out that the most notable variable in this round of "good news turning into bad news" is the Iran War. The "additional disturbance" brought by the US-Iran military conflict is the event that has deviated the most from historical patterns so far, significantly impacting oil prices and breakeven interest rates. The rise in oil prices itself is a policy pressure - Jim Paulsen, Chief Investment Strategist at Leuthold, found a strong negative correlation between the Citi Economic Surprises Index and a policy stress index measuring oil price increases, 10-year Treasury yields, and a strong dollar (correlation coefficient up to 0.7). Changes in the policy stress index often precede the Economic Surprise Index by three months. This means that the current strong economic data may be a lagging reflection of the oil price increases and policy stress accumulation three months ago. Triple logic: why strong data turns into poison for the stock market Logic 1: Overheating economy leads to inflation and rate hike fears Strong economic data is a double-edged sword. Bob Lang, Founder and Chief Strategy Officer of Explosive Options, warned, "Monetary policy may shift next week and in the fall, reflecting a more aggressive government stance against inflation." The market is concerned that sustained stronger-than-expected economic data will complicate the Federal Reserve's task of controlling inflation within the 2% target range. Despite weaker-than-expected June CPI and PPI data, which momentarily suppressed rate hike expectations, Fed officials remain cautious. Chair Powell stated that it was premature to declare "mission accomplished" based on one lower CPI data; Governor Waller warned that if core inflation overheats again, the Fed may need to tighten policy soon. US bank economists still expect the Fed to hike rates at the September, October, and December meetings. Logic 2: Valuations have priced in the most optimistic scenario Ken Mahoney, CEO of Mahoney Asset Management, pointed out that the stock market has risen by 17% since late March, and current valuations may already reflect the most optimistic expectations. "The most optimistic results may already be reflected in stock prices, and solid economic reports may now actually put pressure on the stock market," Mahoney said. "There is an asymmetric change in how news is being interpreted." Valuation pressures are particularly pronounced. As of July 14, 2026, the S&P 500's PE-TTM was 28.35 times, at the 79.12th percentile over the past ten years. If the S&P 500 index profit margin is adjusted back to 2019 levels, the index's forward P/E ratio is currently around 27 times, higher than the peak of about 26.5 times during the Internet bubble in March 2000. The Schiller P/E ratio of the S&P 500 index has already exceeded 42 times, about 2.4 times the long-term average of approximately 17.4 times. Logic 3: Rotation of tech stocks and position resetting combination effect Sameer Samana, Director of Global Equities and Real Assets at Wells Fargo Investment Research Institute, believes that the recent struggle of the S&P 500 may be more related to the ongoing rotation of tech and AI stocks. The team at Citigroup led by David Chew pointed out that the recent sell-off of AI and tech stocks has triggered broad risk-off actions, with overwhelming bearish flows in major US stocks. Position adjustments in the S&P 500 index are mainly dominated by long liquidation, while the Nasdaq index shows a more aggressive mix of long liquidation and new short positions. Citigroup warned that stock position liquidation in the US is far from over, with Nasdaq 100 long positions all in the red and positions still skewed to the long side, indicating further selling pressure. Investment advice: Find a balance between caution and optimism In the face of the market environment of "good news turning into bad news," Wang advises investors to remain "particularly cautious." He said, "We have always believed that the stock market is the current economy, therefore, due to the wealth effect, the stock market is the biggest risk to the economy." In terms of asset allocation, in the attitude towards risk assets, we should take a compromise approach." He added that although the short-term situation is "not too bad," given the current situation, we still need to be "particularly cautious." However, not all market participants hold a pessimistic view. HSBC strategists warned earlier that overheated market sentiment, diminishing fiscal stimulus effects, and uncertainty brought by the US midterm elections could trigger a market correction. But at the same time, they also pointed out that current market holdings and sentiment indicators are close to the levels during the economic restart period in 2021. For investors, the current market environment raises a fundamental question: when economic data is stronger, and the market becomes more fragile, the traditional logic of "economic growth benefits the stock market" is being overturned. Until the Citi Economic Surprises Index retreats from its high of 50.3, US stocks may still be under the curse of "good news turning into bad news".