Bank of America chief investment strategist Michael Hartnett says investors' sprint into stocks and technology may be approaching its endpoint, and he recommends beginning to harvest gains in the coming weeks.
Hartnett and his team contend that a "bull capitulation into stocks & tech [will] likely [be] fully complete in the next few weeks," and they identify early June - a period that includes an OPEC meeting, the World Cup kickoff, a milestone birthday for former President Trump, the G7 summit and the first Federal Open Market Committee meeting under Chair Warsh - as a logical time to reduce exposure.
On the inflation front, Hartnett cautions that U.S. consumer price inflation (CPI) could top 5% by the November midterm elections if monthly price gains do not decelerate significantly from the trend of the past six months. He notes historical patterns in which the S&P 500 has tended to pull back after CPI crosses the 4% mark - falling an average of 4% over the subsequent three months and 7% over the next six months.
Producer price inflation (PPI) is already running at 6%, while CPI is approaching 4%, creating a backdrop in which risk assets might become "twitchy," according to Hartnett. Despite that, the strategist expects investors to stay positioned in equities and commodities through November, even as Warsh is not expected to raise rates this year.
Hartnett highlights the semiconductor sector as an example of how extended positioning has become. The SOX semiconductor index is trading 62% above its 200-day moving average, a degree of divergence that the strategist likens to the Nasdaq's stance near the dotcom peak.
Recent asset flows underline the market's appetite for risk. Bonds attracted $28.1 billion, marking a 55th straight week of inflows. Stocks took in $20.5 billion overall, led by U.S. large-cap equities with $24.4 billion - the largest weekly inflow for that segment in five weeks. Technology funds recorded $5.4 billion of new money, their strongest intake since February, and infrastructure funds posted a record $1.5 billion inflow.
Not all markets saw inflows. China equities experienced their largest outflow since January, losing $22.2 billion. Cryptocurrency products delivered their biggest weekly redemption since February, shedding $1.3 billion. Conversely, gold received $2 billion of inflows.
Market sentiment metrics also shifted. The BofA Bull & Bear indicator climbed to 7.6 from 7.2, moving closer to the sell signal threshold set at 8.
Contextual note - The strategist's guidance focuses on trimming positions in an environment of elevated inflation readings, strong fund flows into risk assets, and concentrated strength in technology and semiconductors. Investors and market participants may interpret these signals differently depending on risk tolerance and portfolio objectives.