Stifel said Nvidia stock could feel the most pain if the stock market experiences a correction later this summer.
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Bitcoin's 10% sell-off since June 7 is sending a warning sign to the broader stock market, according to Stifel strategist Barry Bannister.
In a Wednesday note, Bannister highlighted the strong correlation between bitcoin and the Nasdaq 100 since 2020 as the cryptocurrency shares characteristics as a speculative risk-on asset more than it behaves like "digital gold."
But while bitcoin has traded lower in June to around the $65,000 level, the broader stock market continues to hit new record highs driven by gains in mega-cap tech stocks like Nvidia and Apple.
Bitcoin's inability to hit new record highs suggests the stock market is likely to play catch-up as it's set to decline in line with the cryptocurrency, according to the note.
"Recently the weakening of bitcoin signals an imminent S&P 500 summer correction and consolidation phase," Bannister said.
Bannister isn't the only analyst on Wall Street taking stock market cues from bitcoin.
Fairlead Strategies founder Katie Stockton told CNBC on Monday that she, too, is tracking the broadening divergence between US tech stocks and bitcoin.
"When we see bitcoin pulling back in that framework and the Nasdaq 100 just forging higher, that concerns us to some degree, just short term," Stockton said. "We do sense that that divergence is something that will ultimately probably catch-up with the Nasdaq 100 Index as soon as people say 'well wait a second, Nvidia is maybe a little overstretched here."
Adding to Bannister's conviction of an imminent stock market sell-off is the Federal Reserve, which could keep interest rates higher for longer to combat still-elevated inflation.
"The correction we expect in risk assets is furthered by our view that the Fed shifts away from its current cautious dovishness as inflation remains high ('last mile' issues), thereby exposing the over-valued S&P 500 vis-a-vis the financial conditions index and other measures," Bannister said.
In a summer correction scenario, Bannister sees high-flying Big Tech stocks like Nvidia getting hit the hardest as analysts' forward earnings estimates show signs of peaking.
"As NVDA follows past cycles, the leader on the way up may lead the 3Q24 correction on the way down," Bannister said.
But Bannister did concede that he might be early on his call for a market correction as bubbles often march to the beat of their own drum.
It is possible that stocks continue to rise before experiencing an even more painful decline of about 20%.
"Past bubbles since the 19th century indicate the S&P 500 could well rise to ~6,000 at year-end 2024 and then round trip to near where 2024 began five quarters later, by ~1Q26 (S&P 500 ~4,800)," Bannister said.
