Brexit's Real Pain Is Still Ahead Despite Rebound, BofA Strategist Warns

Bank of America-Merrill Lynch has a warning for investors who have sighed in relief following the U.K.'s surprising vote to leave the European Union (EU).

Merill Lynch made this known while speaking on a CNBC show.

The message is clear: Just because the S&P 500 Index has recovered more than 90 percent of its post-Brexit vote losses, doesn't mean the United States is out of the woods. The firm says it's just a matter of time until companies start to reveal just how hard Brexit is hitting them—and it could soon get quite ugly for stocks.

"What's kind of unnerving to me is that if you look at last quarter's commentary and company outlooks, only 26 companies in the S&P 500 even mentioned Brexit," BofAML's head of U.S. equity and quantitative strategy Savita Subramanian recently told CNBC's "Fast Money."

He added: "A very small proportion of companies even had this on their radar. Now, all of the sudden you've to potential for weaker growth in Europe, potential for recession in the UK."

Subramanian predicted 2017 is actually the year when Brexit will inflict the most pain on U.S. companies. She expects they'll start providing clues during second quarter earnings season, which begins in just a few weeks.

"I do think that they're going to get questions from the Street on, 'How are you thinking about your European division or your European sales exposure given what's going on?'," she said.

"A decent chunk of U.S. company sales come from Europe, 20 percent or more and that's going to be the risk."

In her latest research note, she highlighted the firm's stock market sentiment indicator, which fell to its lowest level in three years. It's actually considered a very bullish sign for the market.

Yet Subramanian is sticking by her 2000 year-end S&P target, the lowest on the Street and about 100 points below the index's Friday closing price.

Beyond the potential effects of the Brexit, Subramanian noted that the markets are also heading into a seasonally weak period.

Companies are having a tougher time raising capital and company balance sheets have gone back to leverage ratios not seen since 2007, according to Subramanian. It's a scenario which typically happens in a late stage bull market.

Credit :CNBC