Bank of America warns: If the credit storm escalates, pension funds may be forced to liquidate index funds, potentially becoming the next bomb for U.S. stocks
Bank of America strategists warn that tightening credit markets may force pension funds to sell index funds, leading to a sharp decline in U.S. stocks. Savita Subramanian pointed out that if private lending remains sluggish, institutions like pension funds may collectively sell stocks to avoid losses from asset valuation downgrades. Concerns about bad loans at small banks have intensified, with the regional bank stock index declining for four consecutive weeks. She advised investors to be selective in their investment choices and noted that the S&P 500 is overvalued on several metrics, with bear market signals already triggered
According to the Zhitong Finance APP, Bank of America strategists have pointed out that signs of further tightening in the credit market could trigger a new round of declines in the U.S. stock market, as long investors such as pension funds may be forced to sell assets.
Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Securities, noted in a report on Monday that if private lending continues to remain sluggish, institutions like pension funds may be compelled to sell index funds to avoid punitive losses from markdowns in private asset valuations and to meet ongoing funding obligations. She emphasized that passive investing has "dominated the U.S. stock benchmark index S&P 500," thus an economic downturn will force funds tracking this index to collectively sell stocks.
This warning comes as concerns grow that bad loans from small banks may spread to other areas of the stock market. Data released on Thursday showed that the regional bank composite stock index in the U.S. fell more than 6% in a single day, marking its fourth consecutive week of declines, setting a record for the longest losing streak of the year.
Bank of America is not the only institution warning about valuation issues and the potential for continued selling pressure from index-tracking funds. Matt Maley, chief market strategist at Miller Tabak + Co., also pointed out that exchange-traded funds (ETFs) tracking banks could exacerbate selling pressure. He analyzed that bank ETFs have shown significant weakness, and even a slight decline could confirm a major turning point in bank stocks.
In light of the risk that pension funds may be forced to sell, Subramanian advised investors to "select investments cautiously."
In addition to credit risks, Bank of America noted that the S&P 500 index is "statistically overvalued" on 20 valuation metrics, and the three-year bull market is facing valuation risks. Meanwhile, the probability of a market downturn is also increasing.
Subramanian specifically mentioned that 6 out of the 10 bear market warning signals tracked by her team have already been triggered, and historical data shows that an average of 70% of bear market signals are triggered before the market peaks and continues to decline. She concluded that the current "bear market signals indicate a need for extra caution."
