FILE PHOTO: Traders work on the floor of the New York Stock Exchange (NYSE) Aug. 16.Brendan McDermid/Reuters
Investors in U.S. stocks are in for a rough few months.
Strategists at Bank of America Merrill Lynch warned in a note late Wednesday that a hiccup in corporate profits would be enough to push the S&P 500 Index down by more than 10 percent before Valentine's Day, although they remain bullish on equities over the longer-term. The firm's "Bull and Bear Indicator" is signaling "close to sell" with a duration of one to three months, according to the report from Chief Investment Strategist Michael Hartnett.
"Assuming no recession, the most obvious catalyst to hurt today's consensus & incite a big correction is a spike in wage and inflation data that brings back 'fear of Fed,"' the strategists wrote. "In our view higher bond yields and higher bond market volatility are necessary to engender a major correction in equity & credit markets."
For buy-and-hold investors, it's an outlook almost worth ignoring. But for anyone trying to time the market heading into the New Year, the next few months have the potential to be harrowing if Bank of America is right.
To gauge the timing and severity of the correction, investors should watch tax reform and other stimulus boosting policies coming out of Washington, manufacturing numbers, cash levels in the firm's weekly fund manager survey and central bank balance sheets, according to Bank of America.
This would then set up 2018 and 2019 as "a period of volatility, aggressive Fed tightening to pop bubbles, and more hostile War on Inequality and Occupy Silicon Valley politics, setting the stage for the end of the bull market as Icarus crashes back to Earth," they wrote.