We're in a 'buffalo' market, Bank of America says. Here's what that means for investors

The Charging Bull in the Financial District in New York City.

Mairo Cinquetti | Nurphoto | Getty Images

After weeks of hitting new highs, the S&P 500 index on Wednesday suffered its worst trading session since 2022.

The market broadly began to recover Thursday amid a sell-off in technology stocks. Experts say those stock moves and shuffling sectors are common during a bull market.

But Bank of America is calling today’s conditions something else — a buffalo market — which is still in the bull family. But unlike the bull market, it may get tired after a strong runup.

“It might roam, it might wander in the summer months,” said Marci McGregor, head of portfolio strategy at Merrill and Bank of America Private Bank. “But ultimately, what will turn the buffalo back to a proper bull is fundamentals.”

The firm’s outlook sees markets finishing higher this year, based on factors including earnings, the investment cycle, financial conditions, interest rates and generative artificial intelligence.

“We think those fundamental ingredients are in place for the uptrend to continue,” McGregor said. “But you may get some choppiness.”

Expect a pickup in volatility around the election

Election years also tend to come with distinct market patterns.

From July through November, investors can expect a choppy feeling to the markets, McGregor said.

Once the election is over, there may be a strong broader direction in November and December.

Bank of America therefore expects U.S. equities to end the year higher than where they are today, she said.

Those patterns tend to hold true regardless of the outcome on Election Day, according to McGregor.

Expect to see a lot of market volatility for the next several months: Hightower's Stephanie Link

To best forecast how investments will fare under the next presidential administration, it is wise to pay more attention to policy than politics, McGregor said. The policies that are actually put into effect will have a bigger influence on sectors, industries and companies than which party is elected to power.

The current earnings recovery — following an earnings recession in the first half of last year — is a bigger factor to watch now, McGregor said.

“Ultimately, I think this really comes back to earnings,” McGregor said. “That’s what I really see as the catalyst for the next rotation of the market, more so than the election.”

Resist the temptation to hold too much cash

Higher interest rates put in place by the Federal Reserve have provided the best returns on cash in years.

Yet, experts have started to signal that some investors may be making the mistake of holding too much cash.

“Under-investing is a risk,” Callie Cox, chief market strategist at Ritholtz Wealth Management, recently told CNBC.com.

Likewise, McGregor said she has started to warn clients that the current higher returns on cash will not always be available and sitting out the market gains carries risks. Bank of America expects the Fed to start cutting rates this year, with a first cut in September followed by another in December.

Sitting out of the markets may have lasting lifetime consequences for investors who are working to meet long-term goals. That goes particularly as the markets are up more than 60% since October 2022, according to McGregor.

“If we get a pullback and we get a pause in the market, we will view it as a buying opportunity if clients are not at their target allocation,” McGregor said.