‘Big Rally’ Before ‘Big Collapse’: BofA Strategist Does Not See a Bull Market

Traders work on the floor of the New York Stock Exchange (NYSE) in New York on March 7, 2023. Brendan McDermid/Reuters

Michael Hartnett, a strategist at the Bank of America, is warning investors that the current market rally may not last long and could be followed by a large decline.

The S&P 500 has risen by over 15 percent year-to-date as of June 16. Recently, the index rose 20 percent above its low hit on Oct. 12, 2022. Technically, when a stock rises 20 percent or more from its lows, it is seen as a sign of a bull market. However, Hartnett is not convinced that this is the beginning of a “brand, new shiny bull market,” he wrote in a note on Friday, according to Bloomberg. The analyst said that the current market looks similar to what happened back in 2000 or 2008 when a “big rally” was followed by a “big collapse.”

Hartnett sees up to 150 points in upside potential in the S&P 500 versus a 300-point downside potential until Sept. 4 Labor Day.

In February, Hartnett predicted the S&P 500 to drop to 3,800 by March 8, which failed to materialize. He blamed the failure on the U.S. economy for avoiding a recession and a credit crunch in the first half of the year.

Investors have poured money into tech companies this year. Hartnett called the rally, powered by interest in artificial intelligence tech stocks, an “unanticipated event.”

Until the Fed raises interest rates and unemployment breaks above 4 percent, stocks can potentially stay higher, he wrote in the note. Last year, Hartnett correctly predicted the selloff in stocks.

The New Bull Market, Liquidating Tech Stocks

Mike Wilson, the chief U.S. equity strategist and chief investment officer for Morgan Stanley, dismissed the idea of a 20 percent threshold for declaring new bull markets, saying that the firm does not “find much value” in such measures.

There have been “several instances of bear market rallies that exceeded the 20 percent threshold, only to eventually give way to new lows,” he said in a June 12 podcast.

For instance, after the 1946 boom, the S&P 500 corrected by 28 percent. A 24 percent choppy bear market rally followed that lasted for around 18 months until it fell to new lows a year later.

“Thus far, it appears similar to the current bear market, which corrected 27 and a half percent last year and is now rallied 24 percent from its intraday lows but is still 10 percent below the highs,” he said.

Some experts are recommending investors liquidate their tech positions due to concerns the present rally might not stick.

In a June 14 commentary, Scott Wren, senior global market strategist at Wells Fargo Advisors, warned that “investor caution should remain front and center. We do not think now is the time to be looking to add additional risk … We do not want to chase this rally higher. We don’t believe now is the time to get less defensive.”

Since the IT sector has performed strongly over the past 12 months, Wren recommends “trimming positions” in this sector and moving the funds into “attractively priced sectors” like healthcare, energy, and materials.

“Technology valuations are no longer attractive based on our analysis, and an environment of higher-for-longer interest rates is also a negative for the sector,” he wrote.

S&P 500 Performance

According to data from Slickcharts, out of the 503 companies listed in the S&P 500, only 292 firms have been in the green so far this year as of June 15. The remaining 211 are in the red.

The biggest growth was seen in Nvidia Corp., which registered a year-to-date return of over 190 percent, followed by Meta at 134 percent, Tesla at 107 percent, and Carnival Corp. at 100 percent.

The biggest loser has been Dish Network which lost over 55 percent, followed by Advance Auto Parts at 52 percent, KeyCorp at 42 percent, and Zions Bancorporation at 41 percent.

At present, people are split as to where the S&P 500 is headed for the remainder of the year, according to a recent survey conducted by Investopedia.

While 23 percent of respondents expect the index to deliver 5 percent returns or more over the next six months, 18 percent expect it to fall by 10 percent or more.

Inflation was cited as the top concern by 61 percent of respondents, followed by recession at 59 percent, America’s ties with China at 50 percent, and persistently high interest rates at 49 percent.