BofA Sees $6 Trillion Stock Slump, Clashing With Credit Suisse

(Bloomberg) -- The swings are getting bigger in stocks, and the divide is getting wider among people whose job is to forecast them.

Bank of America strategists led by Michael Hartnett say they see another correction coming, similar to the one in early February when about $6 trillion was erased globally. This year's turbulence is part of a topping process in which everything from corporate profits to monetary stimulus is peaking, they say.

The S&P 500 is likely to drop to 2,534, a level where the last 10 percent correction ended, the strategists wrote in a March 1 note.

The view stands in contrast with Jonathan Golub at Credit Suisse, who sees the S&P 500's recent retreat as partly an overreaction to President Donald Trump's new tariff on steel imports. Earnings growth is accelerating, underpinned by U.S. tax cuts and a yearlong synchronized global recovery, he said.

The S&P 500 has lost more than 4 percent over past four days amid hawkish comments from Federal Reserve Chairman Jerome Powell and concern over a trade war. The Cboe Volatility Index, a gauge of options costs tied to the S&P 500 also known as VIX, surged 56 percent over the stretch, reaching as high as 26.22.

The spike in the VIX is a signal to buy stocks to Golub, who found that the S&P 500 has historically risen an average 6.9 percent three months after the VIX shows a reading above 25.

“Unless the current trade issues metastasize into a greater problem, the subsequent renormalization in the VIX should provide an excellent buying opportunity,” Golub said.

Divisions are getting starker in a bull market just days away from its ninth anniversary. While bulls say the unlikelihood of a recession is one reason to stay in stocks, skeptics say the outlook is less promising with the Fed poised to accelerate the pace monetary tightening while Trump shifts focus from fiscal stimulus to domestic protectionism.

The market's retreat this week shows the “honeymoon” with the Fed and the White House is over, according to Fundstrat strategist Tom Lee. While it's still too early to exit stocks, the shift in narratives behind policy is worth monitoring, he said.

“This is another change in the market backdrop compared to 2017, on top of the change in inflation outlook (wages) and the resulting expectations for long-term rates (now higher),” Lee wrote in a note to clients.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Chris Nagi, Richard Richtmyer

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