Investing.com -- In a research note Monday, Bank of America analysts highlighted four key macro themes that are driving market positioning risks: China, Fed rate cuts, economic trends, and tax loss harvesting.
Here's a breakdown of each theme and its potential impact on markets.
China: Cautious Positioning for a Rally: Despite a recent rally in Chinese equities, many investors remain skeptical about its sustainability. BofA strategists believe there's room for a potential re-rating in Chinese stocks.
However, they note that U.S. mutual funds are not positioned for a sustained rally. Out of the 50 S&P 500 stocks most sensitive to the MSCI China index, BofA says only 13 are overweight by aggregate funds. This indicates that investors are better prepared for a "head-fake" than a prolonged surge in China-exposed equities, according to the bank.
Fed Cuts: Overlooking Equity Income: With the Federal Reserve expected to cut interest rates by approximately 2 percentage points, BofA predicts that retirees may shift their cash from money market funds into higher dividend-yielding equities.
However, they explain that large operators (LOs) have increasingly favored long-term growth (LTG) stocks over high dividend yielders.
This shift is evident in the record-low aggregate dividend yield of fund holdings compared to the S&P 500. BofA states that even retail investors have shifted toward tech and growth stocks, with four out of five of the most widely held stocks in Merrill accounts being tech.
Defensive Stance Despite Economic Optimism: While BofA's economists have revised GDP and earnings forecasts upward through 2025, both long-only (LO) and hedge funds (HF) remain defensive.
The bank says that despite the Fed embarking on an easing cycle, funds continue to hedge against a slowing economy.
BofA argues that this "double-stimulative" environment could favor cyclicals over defensive stocks, with value stocks potentially leading the way as profits improve.
Tax Loss Harvesting: Prepare for Red October: According to BofA, October could bring tax loss harvesting, a strategy that has been prevalent since the Tax Reform Act of 1986.
They explain that historically, stocks down 10% or more by the end of September have underperformed the S&P 500 in October by 85 basis points. BofA believes these trends may create headwinds for certain stocks before a potential November rebound.