Bank of America (BofA) is issuing a warning on US equities, saying that a correction in the stock market may be approaching next week.
BofA strategists say a dip in US stocks following the Federal Reserve’s Jackson Hole Symposium on August 21st-23rd is within the realm of possibility, according to a note seen by Bloomberg.
The bank’s analysts, led by strategist Michael Hartnett, say that investors have been piling into riskier trades like equities, crypto assets and corporate bonds due to optimism that the Fed will begin cutting interest rates, easing the government’s debt obligations and propping up the labor market.
With the expectations already centered around Fed Chair Jerome Powell giving off a dovish tone at Jackson Hole, Hartnett says investors may be pushed into a “buy rumor, sell fact” trade, putting pressure on an increasingly hot market.
Hartnett also says that gold, commodities, crypto assets and emerging market (EM) assets will be key winners in a trend of investors looking to hedge against a weaker dollar.
In a recent survey, BofA found that 91% of polled fund managers think US stocks are overvalued, the highest rate since 2001.
The bank’s poll also found that investor allocation in foreign markets has climbed to its highest weight since February, signalling a potential sentiment shift away from US markets.
Hartnett warned that the recent stock market rally may be at risk of turning into a bubble, especially given that the bank’s survey showed that cash levels as a percentage of total assets were at 3.9% – a level that has historically signalled an incoming sell-off.
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