Bank of America warns investors unprepared for stock-market correction

Bank of America just dropped a warning for stock market investors, arguing that they’re stepping into 2026 dangerously unprepared for a potential stock market correction. 

Following a historic AI-powered three-year bull run, the big bank says investor optimism remains high while downside protection is low, leaving little room for surprises. 

That combo has historically proven to be a recipe for disaster.

In many ways, I guess we saw a preview of that when stock markets sold off sharply on Tuesday, Jan. 20, 2026.

Here’s how the big indices fared yesterday:

• S&P 500: -2.1%
• Nasdaq: -2.4%
• Dow: -1.8% (down 870 points) 

Markets reacted to fresh tariff threats and growing trade-war uncertainty, pushing investors into risk-off mode.

More specifically, global markets reacted to President Doland Trump's escalation of his push to acquire Greenland, stoking concerns over a “Sell America” trade agenda.

If you’re not sweating bullets yet, collectively, the Magnificent Seven stocks shed an eye-popping$653 billion in market value yesterday.

At the same time, gold prices jumped 1.5% and are trading around $4,737 per ounce, having surged an incredible 10% in the past month alone as investors flocked to safe-haven assets.

So it seems just a shift in expectations can trigger a sell-off that investors aren’t prepared for.

The bigger risk for stock market investors is complacency, not panic, especially in the current geopolitical setup where policy surprises have become the norm.

BofA says positioning is the real risk

BofA’s stark warning is based on its latest fund manager survey, pointing to a remarkably lopsided positioning.

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At the beginning of the year, U.S. fund managers are the most bullish they’ve been on stocks since July 2021.

However, at the same time, protection against a likely market correction fell to an eight-year low.

Naturally, the AI-driven optimism continues with the heavy lifting.

The survey showed that 38% of managers expect robust global growth backed by sustained earnings, even as risk buffers disappear. 

On top of that, cash levels have dropped to record lows, while stock market exposure is near cycle highs, with 48% of managers remaining overweight on stocks. 

However, the problem is fragility: nearly 50% of survey participants said they haven’t gotten any protection against a steep market drop, the highest since 2018.

“Low levels of stock market hedging are irrelevant in a world of positive surprises,” the bank warned.

Ray Dalio argues gold is key diversifier

Legendary fund manager Ray Dalio dropped a curt message to investors that gold is taking on a bigger role as a hedge.

Related: Billionaire Dalio sends 2-word warning on markets

For some color, Dalio is best known as the founder of Bridgewater Associates, a macro powerhouse he launched back in 1975 and built into becoming the world’s largest hedge fund.

Speaking at Davos, the Bridgewater founder said the global market is shaking up, which is why it’s prudent for investors to allocate 5% to 15% of their portfolios to gold.

Dalio’s warning echoes what I recently wrote about BlackRock CEO Larry Fink’s growing concern over the U.S. national debt.

Fink essentially said that the system can continue absorbing massive borrowing for a really long time, but once questions arise over fiscal discipline, markets reprice fast.

Dalio believes gold’s stellar performance and behavior build the case for much stronger exposure.

Gold is beating tech and drawing big money

Last year, he noted, gold performed even better than volatile technology stocks, which dispels the idea that gold’s just a defensive hedge.

Related: Every major analyst's gold price forecast for 2026

For perspective, the Technology Select Sector SPDR Fund gained 24.6% in 2025, compared to spot gold that surged 65% in 2025.

Moreover, Dalio added that central banks and wealth funds are buying the precious metal for diversification rather than as a speculative asset. That shift points to a deeper issue of a lack of trust between the U.S. and holders of dollar-denominated debt.

To back that point up, according to a World Gold Council survey, Central banks scooped up more than 1,000 metric tons of gold in each of the past three years, soaring above the 400-500 ton annual pace seen in the prior decade.

Geopolitical tensions complicate that dynamic even more, which is why Dalio feels it's best to move away from bonds and maintain “a greater than normal amount” of gold.

Related: IMF drops blunt warning on US economy