"The good news is also bad news" curse reappears! Citigroup's Economic Surprise Index breaks 40, and U.S. stocks may face the pattern of "three weeks of decline, three months of recovery."

The Zhitong Finance APP has learned that the U.S. economy is showing unexpected resilience—strong labor market, robust retail sales, and a recovery in regional manufacturing. However, for U.S. stock investors, this "good news" is turning into real "bad news." The latest research from Leuthold Group reveals a disturbing market pattern: when Citigroup's U.S. Economic Surprise Index exceeds the critical threshold of 40, the S&P 500 index tends to record negative returns in the following three weeks, typically taking an average of three months to recover. Currently, the index stands at 50.3— the "good news is bad news" curse is repeating on Wall Street.

Historical Pattern: The "Three-Week Curse" Verified 28 Times

Since Citigroup launched the Economic Surprise Index in 2003, data tracked by Leuthold Group shows that there have been 28 instances where the "Main Street Economy" indicator reading reached 40 or above, and the S&P 500 index recorded negative returns in the subsequent 21 trading days. Each time, the market took an average of three months to recover from these losses.

Chun Wang, Director of Multi-Asset Strategies at Leuthold, candidly stated, "We have indeed noticed this change in market dynamics, especially in the past two to three months, where good news is often accompanied by weak stock market performance." This "good news is bad news" situation is the result of various intertwined forces.

The Citigroup Economic Surprise Index has remained in positive territory this year, but the recent drop in oil prices has further boosted the index. In June, the index briefly surpassed 63, reaching its highest level since 2023. This indicates that the extent to which U.S. economic data has exceeded expectations has reached a rare intensity in recent years.

The study provides a method to track investor sentiment, as investors attempt to balance between data that is not too hot to trigger inflation (leading to a strong response from the Federal Reserve) and not too cold to slow down economic growth momentum.

Iran War: The "Extra Noise" Breaking Historical Patterns

Wang specifically pointed out that the most striking variable in this round of "good news is bad news" phenomenon is the Iran War. The "extra disruption" brought about by the U.S.-Iran military conflict is the most significant deviation from historical patterns to date, having a notable impact on oil prices and the breakeven interest rate.

The rise in oil prices itself is a form of policy pressure—Leuthold Chief Investment Strategist Jim Paulsen previously found a strong negative correlation between the Citigroup Economic Surprise Index and a policy pressure index that measures rising oil prices, increasing 10-year U.S. Treasury yields, and a strengthening dollar (with a correlation coefficient as high as 0.7), while changes in the policy pressure index often lead the Economic Surprise Index by three months. This means that the current strong economic data may be a lagging reflection of oil price increases and accumulated policy pressures from three months ago

Triple Logic: Why Strong Data Becomes Poison for the Stock Market

Logic One: Economic Overheating Triggers Inflation and Rate Hike Panic

Strong economic data is a double-edged sword. Bob Lang, founder and chief strategist of Explosive Options, warns: "Monetary policy may shift next week and in the fall, reflecting a more aggressive stance by the government in combating inflation." The market is concerned that persistently better-than-expected economic data will complicate the Federal Reserve's task of keeping inflation within the 2% target range.

Although the CPI and PPI data for June were both weaker than expected, temporarily suppressing rate hike expectations, Federal Reserve officials remain cautious. Chairman Waller stated that one low CPI reading does not mean "mission accomplished"; Governor Waller warned that if core inflation heats up again, the Fed may need to tighten policy soon. Bank of America economists still expect the Fed to raise rates at its meetings in September, October, and December.

Logic Two: Valuations Have Fully Priced in the Most Optimistic Scenarios

Ken Mahoney, CEO of Mahoney Asset Management, points out that the stock market has risen 17% since late March, and current valuations may already reflect the most optimistic expectations. "The most optimistic outcomes may already be priced into stocks, and robust economic reports may now put pressure on the market," Mahoney said. "There has been an asymmetric shift in how people interpret the news."

The pressure signals at the valuation level are particularly pronounced. On July 14, 2026, the S&P 500's PE-TTM was 28.35 times, at the 79.12th percentile over the past decade. If the S&P 500's profit margins revert to 2019 levels, the index's current forward P/E ratio is about 27 times, higher than the peak of approximately 26.5 times during the internet bubble in March 2000. The Shiller P/E ratio of the S&P 500 has surpassed 42 times, reaching about 2.4 times the long-term average (approximately 17.4 times).

Logic Three: The Combined Effect of Tech Stock Rotation and Position Resetting

Sameer Samana, head of global equity and real assets at Wells Fargo Investment Institute, believes that the recent struggles of the S&P 500 may be more related to the ongoing rotation of tech and AI stocks. Citigroup strategist David Chew's team noted that the recent sell-off of AI and tech stocks has triggered widespread de-risking operations, with a significant outflow of funds from large-cap U.S. stocks. The position adjustments in the S&P 500 are primarily characterized by long position liquidations, while the Nasdaq index shows a more aggressive combination of long position liquidations and new short positions.

Citigroup warns that the de-leveraging of U.S. stock positions is far from over, with Nasdaq 100 longs already in the red and positions still relatively high, indicating further liquidation pressure.

Investment Advice: Finding Balance Between Caution and Optimism

In the "good news is bad news" market environment, Wang advises investors to remain "particularly cautious." He stated: "We have always believed that the stock market reflects the current economy, and due to the wealth effect, the stock market poses the greatest risk to the economy. In terms of asset allocation, we should adopt a compromise approach regarding risk assets "He added that although the short-term situation is 'not too bad', given the current circumstances, caution is still required in the future."

However, not all market participants hold a pessimistic view. HSBC strategists previously warned that overheated market sentiment, diminishing effects of fiscal stimulus, and uncertainties brought by the U.S. midterm elections could trigger a stock market correction. At the same time, they pointed out that current market positions and sentiment indicators are approaching levels seen during the economic reopening period in 2021.

For investors, the current market environment raises a fundamental question: as economic data becomes stronger, the market becomes more fragile, the traditional logic of 'growth is good for the stock market' is being overturned. Before the Citigroup Economic Surprise Index retreats from its high of 50.3, U.S. stocks may still be trapped in the 'good news is bad news' curse