Bank of America warns: US stocks may face higher downside risks in the coming months
Bank of America has indicated that US stocks may face higher downside risks in the coming months. Analysis from Bank of America Global Research shows that the S&P 500 Index experiences an average of three declines of 5% or more each year, with at least one correction of 10% annually. The sharp fluctuations in tech stocks have led to the worst performance of the S&P 500 Index and the NASDAQ Composite Index in April. The volatility in the US stock market may continue into August and September, with the approaching US presidential election likely to increase market volatility. However, investors are unlikely to see a full bear market this year. Bank of America Global Research's sell-side indicator has shifted to neutral, which is bullish for stocks
According to the latest information from Zhitong Finance and Economics APP, the rise in the US stock market may slow down in the coming months, as historical and seasonal trends indicate increased risks for the S&P 500 index.
On Monday, based on analysis by Bank of America Global Research, since 1936, the large-cap S&P 500 index has experienced an average of three declines of 5% or more each year, with at least one correction of 10% annually. The stock and quantitative strategy team led by Savita Subramanian at Bank of America Global Research stated in their report on Monday, "We may be on the verge of a pullback."
Recently, the drastic fluctuations in tech giant stocks have led to the worst month for the S&P 500 index and the NASDAQ Composite Index since April, a phenomenon known as "rotation trading." Based on historical experience, market volatility in the US stock market may continue into August and September, a period that typically sees seasonal weakness in the S&P 500 index.
At the same time, with the US presidential election approaching, the stock market may see increased volatility. Since 1928, during election years, the Chicago Board Options Exchange Volatility Index (VIX) has on average increased by 25% from July to November, representing the "risk background" of the stock market. According to Bank of America strategists, the VIX has already surged by 32% in July, potentially marking the largest monthly increase in over two years.
However, Subramanian and her team believe that investors are unlikely to see a full-fledged bear market this year. They point out that some macroeconomic signals indicating a market peak have only been triggered halfway, whereas historically these signals have had an average trigger rate of 70%.
Bank of America Global Research's Sell Side Indicator, a reverse market sentiment indicator that signals bullishness when Wall Street is bearish, has shifted to "neutral." Subramanian and her team stated, "The shift from extremely negative sentiment to neutral in 2023 is bullish for stocks." However, the positive earnings surprises from tech giants have decreased.
Earlier last week, disappointing quarterly results from electric car manufacturer Tesla (TSLA.US) and Google's parent company Alphabet Corp (GOOG.US, GOOGL.US) triggered a sharp sell-off in tech stocks. Bank of America strategists believe there are still opportunities for strong returns in the S&P 500 index, especially for stocks benefiting from dividend payments and "traditional" capital expenditures. However, these stocks represent a smaller proportion in the large-cap index compared to AI and tech-related stocks Most of the US stock market closed higher on Monday as investors prepare for the busy corporate earnings season and the two-day Federal Reserve policy meeting starting on July 30th. The S&P 500 index and the NASDAQ Composite Index rose by 0.07% and 0.08% respectively, while the Dow Jones Industrial Average fell by 0.12%