This Investment Bank Is Reporting Their Clients Are Dumping Stocks. Why?

As Franklin Roosevelt once said, “The only thing we have to fear is fear itself.” Is this true? Markets are often swayed by investor emotions, whether they’re pumped by an upbeat earnings report or afraid of rate hikes. Sometimes these fears are well-founded.  

Bank of America (NYSE: BAC) clients are rapidly selling stocks, particularly in the technology and financial sectors, due to economic concerns and a desire for lower-risk assets. Rising interest rates and economic uncertainty are the main drivers of this trend.

The financial sector is experiencing significant outflows, with BofA's stock impacted after Berkshire Hathaway reduced its holdings by 33.9 million shares. The primary sellers are institutional clients, including pension funds and asset managers.

No More Room To Run?

Apart from the recent selloff, mainly of the top tech stocks, U.S. markets have been seemingly unstoppable. The Dow has been up more than 5% since January. The S&P 500, though sustaining dips in April and the past two days, has been up nearly 14% YTD. The Nasdaq, another rocky ride, has seen a rise this year of more than 16%.

Growth stocks have consistently outperformed value stocks over the past 10-20 years, primarily due to the dominance of tech stocks, especially the "Magnificent Seven" mega-cap companies. Value stocks are underexposed to tech and overexposed to lagging sectors. However, growth stocks are now trading at a 12% premium to fair value, while value stocks are closer to fair value. 

Trouble Ahead?

Many strategists believe stocks can continue to climb, citing factors such as earnings acceleration, moderating inflation, and potential interest rate cuts. However, they also warn of mounting risks, including elevated valuations and a rally concentrated in a few mega-cap tech stocks.

Economic growth is expected to slow, with consumers spending less amid continued high inflation, although it’s improving. Morningstar’s chief economist, Preston Caldwell, forecasts GDP growth of 2.4% for 2024 and 1.4% for 2025. Despite this cooling, most analysts predict a "soft landing" rather than a recession, viewing current trends as a return to normal from pandemic-era highs.

Regarding interest rates, the consensus is that the Federal Reserve will implement one or two rate cuts later this year. This projection is based on progress in controlling inflation, gradual economic deceleration, and a resilient job market.

Given the still uncertain conditions, some strategists recommend diversifying. They suggest considering undervalued areas like small-cap and value stocks to reduce risk and potentially capture future gains.

Neither Julie Stoller nor Stocks.News have positions in Bank of America.