Investment bank Piper Sandler is forecasting a correction in the S&P 500 and has consequently removed Nvidia Corp. (NASDAQ:NVDA) from its model portfolio,

What Happened: Despite a robust first quarter for stocks, Piper Sandler’s Chief Market Technician, Craig Johnson, foresees a 5% to 10% correction in the S&P 500 in the near term, CNBC reported on Thursday. Johnson points to inflated valuations and decelerating momentum as the primary causes for the predicted downturn.

“As investors show complacency within the current uptrend and exhibit a Fear-Of-Missing-Out (FOMO), we believe now is the time to be more vigilant and ‘Cool The Engines,'” Johnson stated on Wednesday.

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Notably, Johnson has removed Nvidia, a significant contributor in the AI sector and a key driver of S&P 500 gains, from his model portfolio. He has instead included Micron Technology Inc. (NASDAQ:MU) and Taiwan Semiconductor Manufacturing Co. (NYSE:TSM) among others.

Despite positive outlooks on Nvidia’s long-term prospects, worries about the chipmaker’s escalating costs have prompted a search for alternative AI investments. Piper Sandler has decreased its model portfolio’s equity exposure from 98% to 90%, allocating 10% to cash.

While other firms have raised their year-end S&P 500 targets following the recent rally, Piper Sandler maintains its target of 5,050, implying a roughly 3% downside from Tuesday’s closing level.

Why It Matters: The S&P 500 has been on a strong run, settling at a fresh record level and recording a 10% increase in the first quarter. This surge is the best first-quarter performance since 2019.

However, the S&P 500 is faring better than the Russell 2000 Index of small-cap stocks which has been on its worst run in 20 years. This disparity is due to investors’ focus on big tech companies like Nvidia, which have seen triple-digit gains over the past three years.

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