A Bank of America strategist is sounding the alarm about the stock market, warning that stocks are flashy signals that often foreshadow a 20% correction.
In an investor note, Savita Subramanian, head of BofA’s U.S. equity and quant strategy, urged investors to “take profits,” warning that she sees “too many red flags” in the market. reports Axios.
“Our bear market signposts – the triggers that typically precede a spike in the S&P 500 – suggest that additional caution may be warranted. Currently, 70% of our signposts are firing, in line with the average observed during previous market peaks.”
Subramanian says the signposts are indicators of market conditions, including investors’ assumption that companies will continue to generate profits at a rapid pace in the coming years, as well as relaxed credit conditions. She also highlights that she sees a very wide spread in the performance of stocks with high and low price-to-share ratios, meaning that high-valuation stocks are rewarded while low-valuation stocks lag behind.
“The dispersion is most pronounced within the technology sector, where the spread between the median stocks of the best/worst performing quintiles is as much as +120. [percentage points]the highest since February 2000, which reached +130 [percentage points] before the market peak of March 24, 2000.”
Meanwhile, Morgan Stanley CIO Mike Wilson says he doesn’t believe the stock market will enter bear territory. He says: “In our view, a correction was inevitable and ultimately healthy if this bull market continues through the end of the year, which remains our baseline.”
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