Bank of America is warning that the S&P 500 looks vulnerable to a correction as tariff risks reassert themselves, unsettling a market that raced to records over the summer.
In a recent note to clients, strategists at the bank said a cocktail of weakening market breadth, renewed U.S. trade salvos, and a stronger dollar has raised the odds of a setback for equities.
The caution lands after a choppy stretch in which volatility jumped and investors rushed to reassess how trade policy, inflation, and corporate earnings intersect.
An event-study from the Federal Reserve Bank of San Francisco found that the April 2 trade announcement sparked a swift repricing across stocks, Treasury yields, and exchange rates, even though many asset prices later bounced.
The analysis concluded that the surprise was large enough to shake assumptions about the growth and inflation path, a useful reminder that policy changes can hit markets before they filter through the real economy.
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The Fed letter is here for readers who want the underlying methods and results FRBSF Economic Letter. The warning from BofA also comes as global watchdogs flag fragility.
The International Monetary Fund’s latest Global Financial Stability Report says stretched valuations and pressure in core sovereign bond markets keep stability risks elevated.
The Fund singles out trade tensions as a factor that could complicate central bank easing and stoke price pressures, which would be a tough backdrop for richly priced equities.
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The Cboe Volatility Index jumped to multi-month highs in recent sessions as tariff rhetoric intensified and dip-buying lost some of its swagger.
That is a notable turn after a summer when Nasdaq hits new all-time high headlines were routine and passive flows kept pushing megacaps higher.
The path from here likely hinges on earnings season guidance and whether management teams acknowledge tariff pass-through or signal a plan to claw back costs.
Gains have been concentrated in a handful of AI-linked leaders, leaving cyclicals, small caps, and parts of value lagging. BofA argues that such narrow leadership amplifies downside if the winners wobble.
A stronger dollar only adds stress for multinationals that translate foreign revenue back into greenbacks and for commodity-linked pockets of the market, where pricing power can be thin during demand scares.
Exporters with U.S. exposure face uncertainty on pricing and volume, while import-reliant sectors could see cost pressure. Ottawa’s recent measures, such as when Canada unveils $1b tariff relief program, underscore how policy moves ripple into margins and hiring.
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The domestic equity tape reflects the same push and pull. The TSX stalls near a record is a familiar setup when global policy risk rises and energy and materials trade on headlines as much as fundamentals.
Corrections are common in long advances and can reset sentiment without ending a cycle. What matters for portfolio construction is the mix of macro shocks and market plumbing.
If tariffs keep inflation sticky, central banks may be slower to ease. If bond market volatility returns, equity risk premium math looks less forgiving. If breadth fails to improve, the index remains tethered to a small set of earnings stories.
Hedging with index puts has become more expensive but can be staged around event dates.
Rotations toward higher-quality balance sheets, consistent free-cash-flow generators, and firms with pricing power can cushion tariff pass-through.
On the other side, any quick de-escalation in trade rhetoric could squeeze bearish positioning and revive animal spirits, though BofA’s message is that the distribution of outcomes has widened.
Bank of America’s call is that this shift, combined with narrow leadership and cross-asset signals, leaves the S&P 500 exposed to a garden-variety correction.
Until policy clarity improves or breadth broadens, volatility is likely to stay a feature rather than a bug.
