Though stocks have mounted a stunning comeback from June lows as investors grow more optimistic about cooling inflation and the Federal Reserve potentially scaling back interest rate hikes, the recent rebound is nothing more than a “classic bear” market rally which is likely to hit new lows, according to analysts at Bank of America.
The summer stock market rally looks to be almost over, according to a recent note from Bank of America chief investment strategist Michael Hartnett, who points to data suggesting that recent gains are a “textbook” bear market rally which is poised to soon run out of steam.
The S&P 500 has jumped more than 15% since hitting a low point for the year in mid-June, in large part thanks to better-than-expected economic data—including a strong jobs report and cooling in consumer prices—in recent weeks.
Despite investor hopes that the worst has passed after a brutal selloff in the first half of 2022, analysts at Bank of America are among experts ramping up warnings in recent weeks that stocks still have further to fall.
“Everyone is bearish but no one has sold stocks,” Hartnett says, pointing to irrational trading activity in meme stocks and adding that after four straight weeks of gains, the market is showing many characteristics of what is likely to be a “self-defeating rally.”
The Bank of America analyst points to the fact that out of 43 bear market rallies since 1929 in which the S&P 500 gained over 10%, the average increase is roughly 17.2% over 39 trading days—meaning that the current rally appears to be maxed out, according to historical data.
What’s more, even after increasing the federal funds rate by 2.25% so far this year, the Federal Reserve is “nowhere near done” with rate hikes to combat inflation, he warns, which will likely put a ceiling on recent market gains.
What To Watch For:
Other analysts at the firm have issued similar warnings in recent days. Bank of America’s head of U.S. equity and quantitative strategy, Savita Subramanian, said in a note to clients on Tuesday that stock market valuations remain far too high for the bear market to be over. A sustained bull market remains “unlikely,” she wrote, citing indicators that instead signal a looming end to the recent bear market rally.
A bear market rally tends to “always narrow” in terms of leadership, Hartnett adds, pointing to the fact that the likes of Apple, Amazon and Tesla have accounted for outsized portions of the market’s recent rebound. Those three stocks have each risen by more than 30% since the market low point on June 16, far outpacing the benchmark index.
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