BNP Paribas Predicts 20% US Equity Rally Amid Underweight Investors

Analysts at BNP Paribas have suggested that a significant rally in US equities could be on the horizon, driven by a combination of factors that might lead to an "unloved" rally. This rally, according to the bank's strategists, could cause the stock market to overshoot on the upside. The bank uses an indicator for equity positioning that has risen to just above a "neutral" reading, suggesting that various investor cohorts, including commodity-trading advisors, volatility-target funds, and hedge funds, are currently underweight on stocks.

The last time institutions were this underweight during a major market recovery was in 2023, a year that saw substantial rallies in US equity indices. BNP Paribas' head of US equity and derivative strategy, Greg Boutle, noted that the addition of risk could be a positive driver for the market. He explained that investors being dragged back into an "unloved" rally could cause the market to overshoot on the upside. The bank's strategists are expecting as much as $20 billion in buying power to come from institutions in the next week as they become forced to jump back into the sudden rally that began amid tariff-induced uncertainty in early April.

Boutle also emphasized that negative headlines do not necessarily mean that the market cannot recover. He stated, "Just because you get a very negative headline, that’s not something that can’t be walked back." This sentiment aligns with the bank's overall bullish outlook on the stock market, which is not unique to BNP Paribas. Other high-profile players, such as Fundstrat's Tom Lee, have also expressed optimism about the stock market. Lee predicted at the start of the year that industrials, financials, and tech would outperform the broader US stock market. According to Lee, these sectors have so far outshone other sectors, with tech now also coming to life. Fundstrat sees these three sectors leading the equity market for the rest of the year.

Lee also noted that one equity group will see more demand next year, a time when he thinks the Federal Reserve will begin to cut rates. "With the Fed cutting rates next year, I think that’s going to be good for interest-sensitive [stocks]. So that should really support financials and it should support small and mid-caps," Lee said. This prediction aligns with the broader market sentiment that lower interest rates could boost certain sectors, particularly those that are sensitive to interest rates.