Bank of America: Bull market is not over yet! Four bullish signals suggest US stocks will hit new highs again
Technical analysts at Bank of America believe that the current bull market is not over yet, as four bullish signals indicate that the US stock market will hit new highs again. Firstly, the narrowing spread of junk bonds indicates that investors are not worried about the overall stock market; secondly, the tightening spread of corporate bonds also shows that the stock market is in a "risk-on" environment. In addition, the record-breaking $6 trillion money market fund has also become a bullish signal that may drive the stock market to continue rising. Finally, the Federal Reserve's financial conditions index has also confirmed the upward trend of the stock market. These factors, along with the favorable seasonal factors at the end of an election year, may help drive the stock market to new highs later this year
As the stock market hit a series of new highs in 2024, there are positive signs indicating that this upward trend may continue.
Stephen Suttmeier, a technical analyst at Bank of America, stated in a report on Tuesday that the ongoing bull market is in good health, with investors generally turning to stocks of smaller companies.
Suttmeier mentioned, "Expanding momentum and rotation are the lifeblood of a bull market, and the S&P 500 hitting highs last week is a strong performance." Suttmeier believes that strong technical factors combined with favorable seasonal factors at the end of an election year may help drive the stock market to new highs later this year.
Here are four bullish indicators that Suttmeier believes support the continued rise of the stock market.
Narrowing Junk Bond Spreads
The yield spread between higher-risk corporate debt (junk bonds) and ultra-safe government bonds does not show signs of concern for the overall stock market.
When investors are worried about the economy and the overall market, they typically demand a higher risk premium, leading to a spike in credit spreads.
Suttmeier stated, "The maintenance of these credit spreads in a narrow state is a positive signal."
Tightening Corporate Bond Spreads
Similar to the signal from junk bonds, the chart below measures the difference between high-quality corporate bonds and the 10-year U.S. Treasury yield.
Suttmeier said, "The BAA spread below 2.0 is still benign." The spread reached 1.38 in April, the lowest level since 1995. Currently, the spread is around 1.58, well below the 2.0 level that Suttmeier mentioned as representing a "risk appetite" environment in the stock market.
$6 Trillion Cash is a Bullish Signal
According to Bank of America, the record $6 trillion in money market funds held by investors is a contrarian bullish signal.
This fund could be a driver for the continued rise of the stock market, especially if the Fed lowers interest rates, making the current 5% cash yield less attractive.
This situation is likely to prompt investors to reassess their cash holdings and eventually consider buying stocks.
Fed's Financial Conditions Index Confirms Stock Market Rally
According to Suttmeier, the stock market has repeatedly hit new highs in recent weeks, and the cyclical bull market high of the Chicago Fed's National Financial Conditions Index also confirms this. This is a healthy signal that should support sustainable growth in the stock market.
The financial conditions index had a significant negative divergence at the end of 2021, when the S&P 500 was rising while the index was falling.
With the financial conditions index recently reaching its highest level since early 2022, there is still room for it to surpass the peak of 2021, indicating that the stock market still has room to rise.