- Risk appetite has turned “twitchy” after the Fed struck a hawkish tone for 2025, BofA says.
- The “Magnificent Seven” stocks have to hold onto their gains to avoid sparking a correction.
- Bank stocks will determine whether the stock meltup becomes a “bull trap” by mid-January.
With investors souring on the outlook for interest rates in 2025, it’s up to the market’s most dominant stocks to keep the party going and avoid sparking a correction, Bank of America said.
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Risk appetite has become “suddenly twitchy” as investors’ uber-bullishness came face-to-face with the Federal Reserve’s toned-down view on rate cuts next year.
According to BofA analysts led by Michael Hartnett, US and global equity breadth appears “dire,” given that a handful of leading equities are propping up major indexes. Without the best-performing “Magnificent Seven” stocks, the S&P 500 would have only gained 8% year-to-date—not the 23% it has returned so far.
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“Winners must keep winning to keep stealth correction ‘under the hood,'” Hartnett wrote on Thursday.
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If the Magnificent Seven and Treasurys can hold at current levels, the analysts say that the index’s recent lows following Wednesday’s Fed meeting are a buying opportunity.
Investors should monitor banking stocks to determine whether the trading melt-up has legs through the next 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 January 20th presidential inauguration.
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In this scenario, investors are lured into the market by a short-term price jump, which can quickly reverse.
As of Friday morning, some Magnificent Seven stocks, including Nvidia and Tesla, are recouping losses. Meanwhile, the 10-year Treasury yield has reversed course after climbing to its highest level since spring.
Others on Wall Street remained convinced that this week’s sell-off will prove itself brief, offering a chance to load up on cheaper equities. Still, correction forecasts have risen among analysts. Fairlead Strategies founder Katie Stockton said this week that she is watching for a dramatic market recovery by the end of the week, or else intermediate-term “sell signals” will be triggered.