BofA said that Trump will stop stocks this year, but one key area of ​​the market to watch closely

• Bank of America views small-cap stocks as a key indicator for tracking the broader stock market.

• A handful of stocks and high valuations limit the stock market, BofA said.

• Small-cap stocks face challenges from high interest rates, which hurt unprofitable companies.

Bank of America A key area of ​​the stock market will help determine whether the bull rally will continue, he said in a note on Friday.

Michael Hartnett, the bank’s investment strategist, said that while President-elect Donald Trump’s influence and policies may provide a safety net for the stock market, the upside is limited by over-concentration, high valuations and overstretched positions in a few stocks. Investors.

Hartnett, the bank’s December fund manager survey, found investors are overweight on U.S. stocks at a record high.

The key signal for the next rally, Hartnett said, is that small-cap stocks have been on the rise since 2010. The key is that they can rally above the defensive level set for 2021.

Small-cap stocks briefly broke above resistance following Donald Trump’s election victory in November, but have given up most of their gains and are trading near resistance as investors worry. Interest rates remain high for a long time.

High interest rates are particularly painful for small-cap stocks because they are more sensitive to changes in borrowing costs. 40% of the companies in the small cap Russell 2000 index are unprofitable, Debt financing usually plays an important role in financing their business.

If the cost of debt is high and a less profitable company comes into debt to refinance, Finally, it can lead to bankruptcy.

According to Hartnett, it’s all systems go if small-cap stocks can break decisively above their 2021 resistance level. But, if not, it could signal broader market weakness, and expect asset indices to reduce their overweight position in the stock market.

Hartnett advises investors to buy bonds with Treasuries, which can peak near the 5% level and often contain large amounts of stocks in the financial, utilities and homebuilding sectors.

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