Time to Look Beyond US Equities? BofA Warns of a Market Shake-Up
1min read The Nasdaq 100 is nearing a critical threshold against the S&P 500 that could disrupt the dominance of US equities, according to strategists at Bank of America Corp.
The tech-heavy Nasdaq's relative valuation to the S&P 500 remains above its 2000 peak, which currently supports investors' heavy allocation to US tech stocks and the US dollar, noted Michael Hartnett and his team. However, a drop below this level could act as a major trigger for investors to rotate out of "US exceptionalism" trades, the strategists warned in a recent note.
Hartnett advised shifting focus to international markets as we move into 2025, highlighting equities in China and Europe as promising opportunities. Historically, the S&P 500 has shown a tendency for significant swings, with double-digit gains or losses expected in 2025. The secret ingredient for a sustained rally in US stocks would be declining bond yields, they said.
However, BofA's strategists caution that bond markets are likely to price in a resurgence of inflation alongside fewer rate cuts in the early part of next year. These conditions could keep bond yields elevated, effectively limiting upside potential for risk assets like equities. The firm's proprietary "investment clock" suggests that 2025 could bring gains in commodities, rising corporate profits, and higher interest rates.
Conclusion:
Bank of America's outlook signals a potential shake-up in equity markets as the Nasdaq approaches a critical valuation threshold against the S&P 500. Investors are urged to consider diversifying into international markets like Europe and China, with the expectation of shifting economic and market dynamics in 2025. Rising bond yields and renewed inflation risks are key factors to watch as they may set the stage for the next phase of global investment opportunities.
