• Bank of America says the recent stock market sell-off is unlikely to be the beginning of a recent bear market.

• Credit markets remain stable, and only three of 10 signals of a market peak have flashed.

• “Several of our sentiment signals suggest that sentiment didn’t hit euphoric levels typically seen at the top of bull markets,” BofA said.

The stock market’s recent sharp sell-off is unlikely to rework right into a full-fledged bear market, in accordance with Bank of America.

The S&P 500 fell as much as 8% since its record high in July, while the Nasdaq 100 plunged greater than 10%. The sell-off was driven by a weak July jobs report, the unwind of the yen carry trade, and concerns of an imminent recession.

But in accordance with Bank of America strategist Savita Subramanian, the tell-tale signs of a stock market peak have yet to materialize.

As an alternative of this being a stock market peak that is on the precipice of an enormous drawdown, it’s greater than likely only a typical correction that happens on average each 12 months.

For perspective, Subramanian pointed to stock market history to focus on that pullbacks available in the market are common.

“5%+ pullbacks are common, occurring over thrice per 12 months on average since 1930 (this marks the second this 12 months after April). Larger corrections are less frequent but still common, with 10%+ corrections occurring once per 12 months on average (the last one was in fall 2023),” Subramanian wrote in a note on Monday.

The proven fact that credit markets remain stable gives Subramanian confidence that the recent sell-off is a typical pullback somewhat than the start of a real bear market.

“To date, credit markets are subdued with a trough-to-peak widening of 70bp for high-yield spreads through last Friday,” Subramanian said.

Typically during panics that evolve into bear markets, bond investors demand a better premium for his or her dangerous junk debt relative to Treasurys, but that has yet to materialize.

The BofA US High Yield option adjusted spread, which measures the difference in yields between junk bonds and Treasury bonds, is at just 3.93%, well below its 5.33% average since inception in 1996.

For perspective, prior stock market panics in 2020 and 2008 led the spread to soar to 9.82% and 21.82%, respectively.

“The recent spread widening could be described as normalization from extremely tight levels toward fair value. Spread widening beyond 450-475 can be concerning, in accordance with our credit strategists,” Subramanian said.

What’s more, Subramanian tracks 10 signals that, when most of them flash, signals that a serious stock market peak has occurred.

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But as of July, just three of the ten signals have flashed, in accordance with the note, which was a stepdown from the 5 signals that flashed in June.

“We saw a maximum of fifty% of those signals triggered in June, below the typical of 70% triggered in prior market peaks,” Subramanian said.

The three stock market peak signals that flashed in July include the web percentage of respondents to the Conference Board survey exceeding 20 when asked in the event that they expect the stock market to maintain rising, an inverted yield curve, and tightening credit conditions based on the Senior Loan Officer Opinion Survey.

But seven other signals tied to investor sentiment, valuations, and macro data have yet to flash.

“Several of our sentiment signals, including our Sell Side Indicator, suggest that sentiment didn’t hit euphoric levels typically seen at the top of bull markets,” Subramanian said.

As an alternative of preparing for a protracted market sell-off, Subramanian recommends investors go bargain hunting and concentrate on buying top quality stocks.

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