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Investing.com - The S&P 500 has risen by roughly 0.6% so far this month, despite a bout of recent volatility that has raised questions around the longevity of a blockbuster rally in the benchmark index.
Year-to-date, the average has surged by more than 14%, recovering from a swoon in April sparked by President Donald Trump’s announcement of sweeping U.S. tariffs. Ongoing enthusiasm around artificial intelligence and expectations for Federal Reserve interest rate reductions have also helped to underpin equities throughout 2025.
But analysts at BofA Securities said risk sentiment took a hit earlier this month, as investors weighed a collection of potential headwinds, including a prolonged federal government shutdown that has delayed key economic data releases and clouded the outlook for the Fed’s rate trajectory. Last week, fears around the credit health of regional U.S. banks as well as renewed trade tensions between the U.S. and China also weighed on stocks.
Although markets have broadly recovered, "uncertainty remains high," the BofA analysts including Adarsh Sinha and Ralph Axel said.
The focus is now on a potential meeting between Trump and Chinese counterpart Xi Jinping later in October, and whether the White House’s threat of imposing triple-digit tariffs on Beijing next month will be extended, the analysts added.
Markets are also grappling with murkiness surrounding the political standoff in Washington, a debate over an annual budget in France, and new Japanese Prime Minister Sanae Takaichi’s plans, they flagged.
"All reflect strife around fiscal expansion. We see fiscal risks driving not just political unrest, but near-term global GDP growth, potentially at material longer-term costs," the analysts wrote.
Meanwhile, the Fed is seen providing only "limited" guidance on rates for the rest of the year at its October 28-29 meeting. Some Wall Street analysts are also predicted the central bank could finally push stop on a longstanding effort to shrink the size of its balance sheet -- a process known as quantitative tightening, or QT -- this month as well, flagging indications of rising frictions in money markets.
Against this backdrop, the BofA strategists said investors should "consider hedging high beta foreign exchange exposure via options." Meanwhile, they maintained their forecast for the USD/CNY currency pair to end 2025 at 7.10 and outlined "downside risk" to the U.S. dollar should the federal government shutdown continue. They also recommended switching to "floating rate liabilities" in the euro and hedging exposure the Japanese yen.