US stocks have recently experienced historic fragility shocks, according to insights from the Bank of America, with tech and US megacaps hitting 30-year frequency and magnitude extremes.
BofA warned that while these shocks have, so far, been idiosyncratic, “borderline erratic” price action signals a shift towards more market fragility. It went on to say that there is a risk of a correlated shock across such powerful companies, which control a significant portion of US and global equity indices. Index volatility is continuing to underprice this risk, “thus offering value as a fragility or broader market hedge”, it added.
ESTX50 long-dated volatility is at a long-term low, BofA reported, with the European Central Bank expected to begin easing financial conditions in the near future and US tech tailwinds continuing to drive equity momentum globally. While the ESTX50 reached within 10% of its all-time high in the first half of the year, “investors could be forgiven for being optimistic about further upside”, the bank concluded.
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