Bank of America: US stocks are in a 'bull' market, avoid holding too much cash

Intelligent Finance APP noticed that after hitting new highs for several weeks in a row, the S&P 500 index experienced its worst trading day since 2022 on Wednesday.

On Thursday, with technology stocks being sold off, the stock market began to rebound generally. Analysts believe that during a bull market, such stock fluctuations and industry reshuffles are common.

However, Bank of America described today's situation as a different scenario—a buffalo market—still within a bull market. But unlike a bull market, it may feel exhausted after a strong rally.

Marci McGregor, head of portfolio strategy at Merrill Lynch and Bank of America Private Bank, said: "It may roam, it may roam in the summer." "But ultimately, what will bring the buffalo back to a normal bull market are the fundamentals."

The bank expects that based on factors such as earnings, investment cycles, financial conditions, interest rates, and the potential of artificial intelligence, the market will rise this year.

McGregor stated, "We believe that these fundamental factors are in place to continue the upward trend." "But you may encounter some bumps along the way."

Expect increased volatility around the election

Election years often come with different market patterns. McGregor mentioned that from July to November, investors may feel the market's volatility. Once the election is over, there may be a larger direction in November and December.

Therefore, Bank of America expects the U.S. stock market to be higher by the end of this year. Regardless of the election day's outcome, these patterns are often correct.

The bank believes that to better predict the investment environment of the next government, it is wiser to focus more on policies rather than politics. The actual implementation of policies will have a greater impact on sectors, industries, and companies than which party wins.

McGregor pointed out that after the profit decline in the first half of last year, the current profit recovery is a more significant factor to pay attention to. "Ultimately, I think it really comes back to earnings." "In my view, this is the real catalyst for the next round of market volatility, more important than the election."

Avoid holding too much cash

The higher interest rates implemented by the Federal Reserve have provided the best return for cash in years. However, experts have begun to suggest that some investors may be making a mistake by holding too much cash.

Callie Cox, Chief Market Strategist at Ritholtz Wealth Management, stated: "Underinvestment carries risks."

Similarly, McGregor has started warning clients that the current high cash returns are not always guaranteed, and sitting on the sidelines without participating in market gains can bring risks. Bank of America expects the Fed to start cutting rates this year, with the first rate cut in September and another in December.

For investors committed to achieving long-term goals, exiting the market may have lasting lifelong consequences. McGregor mentioned that this situation is particularly serious because the market has risen by over 60% since October 2022.

She said, "If there is a pullback, the market pauses, and clients have not reached their target allocation, we will see it as a buying opportunity."