S&P 500 Correction Driven by Hedge Funds, Banks Differ on Outlook

Three of the largest banks in the US have provided their outlooks for the S&P 500 following a significant market correction at the start of the year. JPMorgan Chase analysts, led by Nikolaos Panigritzoglou, suggest that the $5.5 trillion correction was driven by adjustments from equity hedge funds, particularly those employing quantitative strategies and those focused on the technology, media, and telecommunications (TMT) sector. According to JPMorgan, these investment firms, rather than broader investor concerns about a potential recession, were the primary drivers of the correction. The bank indicates that the S&P 500 may be nearing a local bottom, especially if US equity ETFs continue to see inflows.

Bank of America (BofA) holds a different view, believing that the S&P 500 has further downside potential before reaching a price floor. The bank suggests that the correction is not yet over and advises buying the index at 5,300 once certain conditions are met, such as a surge in cash above 4% in the BofA FMS (fund manager survey), high-yield spreads approaching 400 basis points, and accelerated equity outflows.

Morgan Stanley sees the current level of the S&P 500 as an area where tactical rallies could be ignited. The financial services giant stands by its previous call that 5,500 should provide support for a tradable rally, led by cyclicals, lower-quality, and expensive growth stocks that have been hardest hit and have the greatest short base.

Late last year, all three banks predicted that the S&P 500 would reach even higher levels this year. BofA forecasted the index climbing to 6,666, while both JPMorgan and Morgan Stanley anticipated a surge to 6,500. At the time of writing, the S&P 500 is trading at 5,662 points.

JPMorgan Chase's analysis suggests that the recent market correction was not driven by tariff-related headlines but by specific types of investment firms adjusting their positions. The bank's team, led by Nikolaos Panigritzoglou, identified equity hedge funds, particularly those using quantitative strategies and those focused on the TMT sector, as the likely culprits behind the $5.5 trillion correction. This perspective contrasts with the broader market narrative that often attributes corrections to investor concerns about economic conditions or geopolitical risks.

Bank of America's outlook is more cautious, indicating that the S&P 500 has not yet reached its bottom. The bank advises investors to wait for specific conditions to be met before buying the index at 5,300. These conditions include a surge in cash above 4% in the BofA FMS, high-yield spreads approaching 400 basis points, and accelerated equity outflows. This approach suggests that BofA is looking for clear signals of a market bottom before recommending investment in the S&P 500.

Morgan Stanley's view is more optimistic, suggesting that the current level of the S&P 500 could ignite tactical rallies. The bank stands by its previous call that 5,500 should provide support for a tradable rally, led by cyclicals, lower-quality, and expensive growth stocks. This perspective indicates that Morgan Stanley sees potential for a rebound in sectors that have been hardest hit by the recent correction, providing opportunities for investors to capitalize on undervalued assets.

The differing outlooks from these three major banks highlight the complexity and uncertainty of the current market environment. While JPMorgan Chase sees potential for a near-term bottom, Bank of America remains cautious and advises waiting for clearer signals. Morgan Stanley, on the other hand, sees opportunities for tactical rallies in specific sectors. These divergent views underscore the importance of considering multiple perspectives when navigating the market and making investment decisions.