Bank of America warns that the stock market may be experiencing a "bear trap," and after a sharp decline, a strong rebound could follow.

Investing.com — Bank of America warns that the recent weak performance of the stock market may be a “bear trap,” and the market could be approaching a capitulation phase, followed by a significant rebound.

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According to Bank of America’s latest strategy report, the stock market is showing signs of late-cycle pressure, with deteriorating market sentiment and a growing shift towards defensive positioning. The bank points out that this situation often signals an imminent acceleration of a washout phase, during which weak-willed investors will exit the market, thereby creating conditions for a market recovery.

The current market backdrop is influenced by a combination of macroeconomic and geopolitical pressures. The Middle East conflict has led to high oil prices, disruptions in shipping through the Strait of Hormuz, and ongoing inflation concerns, all of which have severely impacted market risk appetite. Meanwhile, uncertainty surrounding the Federal Reserve’s interest rate path continues to limit investor confidence, particularly as rising energy costs may delay policy easing.

Bank of America states that systematic funds and trend followers have been increasing their short positions in stocks, amplifying downward momentum. However, this accumulation of bearish positions also increases the likelihood of a sharp reversal when market conditions stabilize or improve.

Historically, capitulation periods characterized by rapid declines, high volatility, and extreme pessimism are often followed by strong rebounds. Bank of America believes the market may be approaching such a turning point, although near-term downside risks remain.

The bank emphasizes that while future trends may still be volatile, investors should be cautious in chasing the current downward trend. Any easing of geopolitical tensions, stabilization of oil prices, or clearer signals from central banks could serve as catalysts for a rebound.

In this context, Bank of America believes the current sell-off is less a beginning of a prolonged downturn and more a potential late-stage correction; once key uncertainties begin to dissipate, the market may welcome a recovery.

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