Bank of America analysts are warning that the current market volatility is expected to persist in the coming months.
In a recent note, the investment bank highlighted several factors contributing to this outlook, including a weakening macroeconomic environment and policy uncertainty ahead of the U.S. election.
"Volatility has risen after the VIX remained sub-20 for nearly two years," the analysts noted, adding that multiple indicators, such as yield curve as a leading indicator and policy uncertainty in the months leading into a US election, suggests this trend is unlikely to subside soon.
One key concern is the performance of small-cap stocks, which have struggled recently.
Bank of America pointed out that the Russell 2000 index has continued to lag due to unfavorable earnings trends.
"Guidance has been weak (vs. surprisingly strong in large caps), sales have missed, revisions are negative, and the profits recovery has once again been pushed out another quarter," the note stated.
The corporate sentiment within small caps has also deteriorated, making it the worst since late 2021.
Given these challenges, the bank recommends a focus on high-quality stocks, which have historically outperformed during periods of rising volatility.
Additionally, they note that dividend stocks may offer a hedge against the regime shift from recovery to downturn, particularly as the Fed is expected to cut rates.
As the market faces a potential "whipsaw" in performance, Bank of America cautions investors to brace for continued volatility, especially as macroeconomic and policy uncertainties loom.