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Risk appetite has turned ‘jittery’ after the Fed struck an aggressive tone for 2025, BofA says.
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The ‘Magnificent Seven’ stocks need to hold on to their gains to avoid a correction.
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Bank stocks will determine in mid-January whether the stock market crisis will become a bull trap.
With investors gloomy about the outlook for interest rates in 2025, it’s up to the market’s most dominant stocks to keep the party going and prevent a correction from happening, Bank of America said.
Risk appetite has become “suddenly jittery” as investors’ highly optimistic stance came face to face with the Federal Reserve’s watered-down view of rate cuts next year.
The size of the US and global stock markets appears ‘poor’ as a handful of leading stocks support the major indexes, according to BofA analysts led by Michael Hartnett. Without the top-performing ‘Magnificent Seven’ stocks, the S&P 500 would have gained just 8% this year – not the 23% it has returned so far.
“Winners must keep winning to keep stealth correction ‘under the hood,’” Hartnett wrote Thursday.
If the Magnificent Seven and Treasurys can hold at current levels, analysts say the index’s recent lows after Wednesday’s Fed meeting represent a buying opportunity.
Investors should keep an eye on bank stocks to determine whether the trade crisis will have an impact in the coming month. The SPDR S&P Bank ETF must hold at its 2022 high of $55 per share to avoid a bull trap ahead of the Jan. 20 presidential inauguration.
In this scenario, investors are lured into the market by a short-term price increase that can quickly reverse.
As of Friday morning, some Magnificent Seven stocks, including Nvidia and Tesla, are recouping their losses. Meanwhile, 10-year government bond yields have reversed course after rising to their highest level since the spring.
Others on Wall Street remained confident that this week’s sell-off will be short-lived and provide an opportunity to buy cheaper stocks. Still, correction predictions among analysts have risen. Fairlead Strategies founder Katie Stockton said this week that she is looking for a dramatic market recovery by the end of the week, otherwise medium-term ‘sell signals’ will be triggered.
Read the original article on Business Insider
