According to Bank of America, the equity market could see a second quarter 2020 in the red due to a loss of euphoria and chase for large-cap returns. Let's find out the details of this ad together.
The drop in U.S. stock market values is expected to occur after peaking as Bank of America analysts predict. Indeed, the latter predict that the valuation bubble on yield assets and growth stocks will continue as long as the yield on US Treasury bonds remains between 1.5 and 2%.
The markets remain liquid thanks to the world's central banks, which are pursuing a policy of low interest rates and asset buybacks.
Funds invested in equities since the beginning of the year have reached USD 53 billion internationally, including 67 million subscriptions in index ETFs and net outflows of USD 14 billion in actively managed funds.
These signals suggest that the second quarter of 2020 could see the S&P 500 Index reach a peak at the 3,498 point level, which is worth 20 times estimated earnings and would be the longest bull market in US history.
According to Bank of America analysts, this historic high should give way to a new drop caused by a recession, new inflation and an increase in defaults. It should also be remembered that the strong correlation between the S&P 500 and durable goods orders was lacking during the first quarter, with the index continuing to rise against a drop in new orders.
We will also monitor the evolution of the U.S. greenback, which, as a safe haven, tends to appreciate sharply during periods of Federal Reserve monetary expansion. This represents a bearish signal in the equity market that needs to be taken into account.
Finally, we should take into account the fact that the bond market, which is increasingly disorderly, is likely to cause a trend reversal on risky assets. The strongest selling signal here would be a loss of yield on 10-year U.S. Treasuries or the appreciation of the U.S. dollar on the Forex market.
Of course, if the ten-year rate were to suddenly rise above 2%, this would herald a new period of volatility in the equity markets and thus also a probable fall in the prices of the main equity securities.
The Bank of America analysts who produce this report say that these expectations do not take into account the brake that the coronavirus epidemic may represent.