Wall Street banks warn winter is coming; here's why

HSBC Holdings, Citigroup and Morgan Stanley see mounting evidence that global markets are in the last stage of their rallies before a downturn in the business cycle.

Analysts at the Wall Street behemoths cite signals including the breakdown of long-standing relationships between stocks, bonds and commodities as well as investors ignoring valuation fundamentals and data. It all means that stock and credit markets are at the risk of a painful drop.

“Equities have become less correlated with FX, FX has become less correlated with rates, and everything has become less sensitive to oil,“ Andrew Sheets, Morgan Stanley's chief cross-asset strategist, wrote in a note.

For Savita Subramanian, Bank of America Merrill Lynch's head of US equity and quantitative strategy, signals that investors aren't paying much attention to earnings is another sign that the global rally may soon run out of steam.

For the first time since the mid-2000s, companies that outperformed analysts' profit and sales estimates across 11 sectors saw no reward from investors, according to her research.

After concluding credit markets are overheated, HSBC's global head of fixed-income research, Steven Major, told clients to cut holdings of European corporate bonds earlier this month. Premiums fail to compensate investors for the prospect of capital losses, liquidity risks and an increase in volatility, according to Major.

Citigroup analysts also say markets are on the cusp of entering a late-cycle peak before a recession that pushes stocks and bonds into a bear market.