Rates have cracked stocks below the surface, Bank of America derivatives strategists say

The surge in long-term rates has cracked the stock market below what’s easily apparent, say Bank of America’s derivatives strategists.

A team including Benjamin Bowler say the S&P 500 SPX has held up thanks to the major tech stocks, but problems have emerged: gold GC00, -0.51% has been down six days in a row, real estate is flirting with a nearly three-year low and utilities XLU matched their worst five-day return in 20 years outside the global financial crisis and COVID.

Unusually, they say, the big tech stocks are not only holding up the index but also dampening volatility VIX. The bigger picture is that the Fed has conditioned investors to fear upside risk more than downside risk and that investors have become comfortably numb to macro uncertainty, they say. They say S&P index level protection remains good value, in case tech “catches down” to other sectors. The team said various S&P 500 put products appear to be cheap relative to other options, due to high interest rates.

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