Downside risks are high! Bank of America warns: US stocks may pull back

According to a global research report from Bank of America, the rebound of the US stock market may slow down in the coming months, as historical and seasonal trends bring higher short-term risks to the S&P 500 index.

A group of strategists led by stock and quant strategist Savita Subramanian at Bank of America pointed out in a report on Monday that since 1936, the large-cap S&P 500 index has experienced three or more declines of over 5% each year on average, and at least one correction of 10% or more annually.

The strategists wrote, " Therefore, we may be at a point where a pullback is possible."

Recent significant volatility in tech giant stocks is expected to lead to the worst monthly performance for the S&P 500 index and the Nasdaq Composite index since April, as rotation trading accelerates. Referring to historical records, the turbulent period in the US stock market may continue into August and September, a time associated with seasonal weakness in S&P 500 index returns, according to Subramanian and her team.

Meanwhile, as the US presidential election approaches, the stock market may see increased volatility. Since 1928, in election years, the Chicago Board Options Exchange Volatility Index (commonly known as VIX or Wall Street's "fear gauge") has on average risen by 25% from July to November, providing a "risk backdrop" for the stock market.

According to FactSet data, the VIX index has surged by 32% so far in July, potentially marking the largest monthly increase in over two years.

However, Subramanian and her team believe that investors are unlikely to see a full-fledged bear market this year.

The strategists point out that out of the 10 signals before the S&P 500 index peaks, those triggering have accounted for 50%, compared to an average of 70% before previous S&P 500 index peaks, indicating that there is still some distance from a bear market.

Bank of America's global research's sell-side indicator is a contrarian market sentiment indicator that signals bullish when Wall Street is bearish, and vice versa, and now this signal has turned "neutral."

Subramanian and her team stated: "The shift in market sentiment from extreme pessimism in 2023 to today's neutral sentiment is bullish for the stock market," while positive earnings surprises from tech giants have weakened.

Earlier last week, disappointing quarterly performances from Tesla and Google's parent company Alphabet triggered sharp sell-offs in tech stocks.

Nevertheless, Bank of America strategists still see opportunities for strong returns within the S&P 500 index, focusing on dividend-paying companies and traditional beneficiaries of capital expenditures