Spencer Platt/Getty Images
Record-high stock prices and a possible change in Federal Reserve policy have heightened the risk of "fragility shocks" hitting equities in the coming months, Bank of America analysts said.
Last week's sell-off on Tuesday and Wednesday was a sign that investor sentiment remains nervy and could be vulnerable to bigger shocks in the future, analysts including Riddhi Prasad and Benjamin Bowler said in a note on Tuesday.
Stocks have since rebounded to all-time highs, but the analysts said this "will merely encourage more of the investor behavior that historically precedes larger fragility shocks."
In a note last week, BofA analysts said investors had been drawn into low conviction, momentum-driven positions that could be unwound all at once into an illiquid market if the tide turns.
The bank's analysts said in their latest note they're particularly concerned about the potential risks surrounding a possible change in Federal Reserve policy, as the central bank debates when to start withdrawing support for the economy.
"We believe the US equity market is underpricing the risks of a looming tapering cycle. After all, the equity market has feasted on record monetary support post-COVID, and the Fed's outlook remains impaired by the extreme uncertainty in the macro forecasts on which they base their decisions."
The analysts did not spell out their exact definition of a fragility shock, but implied that it meant a relatively sharp drop in stock prices.
However, BofA acknowledged that last week's market sell-off had been met by investors rushing to "buy the dip" in stocks, pushing them back higher. The analysts said that "the jury is out on whether these mini-selloffs are just a feature of today's market or foreshocks preceding a larger fragility event."
The S&P 500, the benchmark US stock index, has risen more than 90% since hitting a pandemic low in March 2020. It has consistently hit record highs over the last few months.
In the note last week, BofA said Federal Reserve Chair Jerome Powell's speech at the virtual Jackson Hole meeting of central bankers on Friday could trigger stock market volatility. It also highlighted August US payrolls data, due on September 3, and the September 22 Fed meeting as potential catalysts.
NOW WATCH: How long humans could survive in space without a spacesuit
See Also:
- Jerome Powell needs to be bold and detail the Fed's next steps at Jackson Hole for the sake of the economy, Mohamed El-Erian says
- The investment chief running the first pure-play space ETF breaks down 3 reasons to invest in the industry - and explains why the emerging industry's volatility draws retail investors to passive funds
- The head of Facebook's cryptocurrency project says the social media giant's Novi digital wallet is ready to come to market
