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The Fed May Not Be So Eager To Rescue The Stock Market, BofA Strategists Warn

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EDITOR'S NOTE: Bank of America strategists including Riddhi Prasad and Benjamin Bowler sent a warning to investors that they may not be able to count on the Fed to prop up the stock market during the next crash like it has in the past. “The Fed may be less willing to so easily deviate from tapering plans and talk the market back up as during the last cycle,” Prasad and Bowler wrote. “As reasons for their skepticism they cite equity valuations and returns accelerating to ‘extremes,’ and ‘increasingly real’ risks of inflation overshooting.” While BoA is warning investors, other Wall Street Banks like Goldman Sachs and JPMorgan Chase are still blissfully telling clients to “buy the dip,” believing that the Fed will continue to protect Wall Street investors no matter how risky their bets are. This makes sense as the Fed's monetary policy has created six consecutive quarters of gain. However, the economy, even with Fed intervention, can’t sustain that forever, which is why the BoA strategists are sounding the alarm.

Photo: Yahoo Finance

(Bloomberg) -- The U.S. Federal Reserve may not be so eager to rescue the stock market this time around, according to Bank of America Corp. strategists.

“The Fed may be less willing to so easily deviate from tapering plans and talk the market back up as during the last cycle,” BofA strategists including Riddhi Prasad and Benjamin Bowler said in a note. As reasons for their skepticism they cite equity valuations and returns accelerating to “extremes,” and “increasingly real” risks of inflation overshooting.

After six consecutive quarters of gains that has been driven by generous monetary and fiscal support, momentum has been fading for U.S. and European equities in recent weeks. The S&P 500 Index is down almost 4% from its record high reached last month, as surging inflation, tapering fears, an energy crisis and slowdown concerns have weighed on the sentiment.

“Investor confidence in buying the dip may only keep waning the longer this sideways price action persists,” BofA strategists said. “The market may need a period of bad news to get the Fed back on its side or reach more attractive valuation levels.”

BofA’s pessimistic view comes into sharp contrast with the strategists at Goldman Sachs Group Inc. and JPMorgan Chase & Co., who advise investors to keep buying the dip, as they see fears of runaway prices and stalling growth as overblown.

In between the two camps, BlackRock Investment Institute strategists this week reiterated their neutral stance on U.S. equities, saying that risks toward the end of the year, including the expiration of the temporary U.S. debt ceiling increase, could potentially trigger market volatility.

“We are tactically neutral U.S. equities as we see U.S. growth momentum peaking and expect other regions to benefit more from the broadening economic restart,” the strategists including Wei Li wrote in a note. “We see a narrowing path for risk assets to push higher and markets more prone to temporary pullbacks.”

Originally posted on Yahoo Finance.

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