US Stocks in Danger? Bank of America: A Reliable Warning Signal Sounds for the First Time Since 1999!
Bank of America issued a warning, stating that the bond market is showing warning signals that are inconsistent with the record-breaking rise in the stock market. In particular, the spread between CCC-rated corporate bonds and B-rated bonds has reached the largest level in 25 years, similar to the situation before the 1999 Internet bubble. In addition, investor uncertainty about artificial intelligence has also led Bank of America to adopt a cautious stance on investing in US stocks. They prefer value stocks over large-cap tech stocks. It is expected that American households will profit from large tech companies in the second half of 2024
According to Bank of America, a reliable indicator in the bond market has issued a warning signal to the stock market for the first time since 1999.
In a report released on Tuesday, the bank emphasized that the price movements of high-risk high-yield bonds have not confirmed the record-breaking rise in the stock market.
Bank of America stated: "In recent years, high-yield bonds have been keeping pace with US stocks, but recently lower-rated companies have underperformed, despite the stock market rally being driven by a few popular companies."
Since the beginning of this year, the S&P 500 Index (SPX) has surged nearly 19%, while the iShares High Yield Corporate Bond ETF has risen by 4%.
However, Bank of America believes that what is more concerning is the divergence between ultra-high-risk bonds and low-risk bonds in corners of the bond market that are less known.
Bank of America stated that the gap between the lowest quality CCC-rated corporate bonds and the relatively safer B-rated bonds is the largest in 25 years.
The bank said: "The warning signal from junk bond spreads is reminiscent of 1999." At that time, the ratio of spreads between CCC-rated corporate bonds and B-rated bonds rose to over 3 times, just before the peak of the dot-com bubble.
In March 2000, the dot-com bubble burst, leading to a 30-month bear market in US stocks, with the Nasdaq 100 Index (NDX) falling by 78%.
The warning signal from the bond market, coupled with uncertainty about when companies will profit from artificial intelligence, has led Bank of America to adopt a cautious stance on investing in US stocks. The bank stated a preference for value stocks over large-cap tech stocks.
Bank of America said: "We expect US households to profit from large-cap tech companies in the second half of 2024. But the credit market has not confirmed the stock rally, and investors are becoming increasingly impatient with artificial intelligence."