Bank of America stated that volatility could make stocks in the United States more vulnerable. Spencer Platt/Getty Images
Bank of America stated that record-high stock prices and calm markets increase the risk of fragile shocks.
Analysts at the bank said that they believe investors underestimate the risk of a change to Federal Reserve policy.
The BofA analysts however acknowledged that investors have a strong desire to "buy the dip".
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Analysts at Bank of America said record-high stock prices and possible changes in Federal Reserve policy could increase the risk of "fragility surprises" impacting equities over the next few months.
Analyst Riddhi Pursad and Benjamin Bowler stated in a note that the sell-off last week on Tuesday and Wednesday was an indicator of investor sentiment remaining nervy. They could be more vulnerable to future shocks.
Although stocks have rebounded to their all-time highs, analysts stated that this will only encourage investors to continue to exhibit the same behavior that has been associated with larger fragility shocks.
BofA analysts wrote last week that investors were being drawn into low conviction, momentum driven positions that could be unwound in an illiquid market if it turns.
Continue reading: Stocks fell in a worrying manner this week. Three of Wall Street's most prominent strategists explain why they believe things will get worse.
In their most recent note, the bank's analysts stated that they are particularly concerned about potential risks associated with a possible change to Federal Reserve policy. This is as the central bank considers whether or not to withdraw support for the economy.
"We believe that the US equity market undervalues the risks associated with a tapering cycle. The equity market has enjoyed record levels of monetary support since COVID. However, the Fed's outlook is still hampered by extreme uncertainty in macro forecasts that they use to base their decisions.
Although the analysts didn't specify what a fragility shock meant, they implied that it would be a sharp fall in stock prices.
BofA admitted that investors had rushed to "buy the dip" stocks last week, which pushed them higher. Analysts said that the jury is still out on whether mini-selloffs are a normal part of today's market, or if they are foreshocks that precede a greater fragility event.
Since March 2020, when the S&P 500, the US stock benchmark, hit a pandemic low, more than 90% has been achieved. Over the past few months, it has reached record highs.
BofA stated last week that Federal Reserve Chair Jerome Powell's speech to the virtual Jackson Hole meeting central bankers on Friday could cause stock market volatility. The potential catalysts were also mentioned by the BofA, which highlighted August US payrolls data due September 3 and the September 22 Fed meeting.
