Bank of America is warning that market euphoria has reached levels that could leave investors vulnerable to a pullback, with its proprietary sentiment gauge approaching an extreme reading last seen in 2021.
The bank’s Bull & Bear Indicator rose from 9.4 to 9.7, nearing its maximum reading of 10 and marking its highest level since 2021. The increase reflects strong equity momentum, heavy credit inflows and tighter spreads across global markets.
The Bank of America market warning comes as global equities trade near record highs, suggesting the risk-reward balance may be becoming less attractive despite the ongoing rally.
The reading does not necessarily signal an imminent crash, but it indicates that investors may be increasingly positioned for further gains, leaving markets more vulnerable to negative surprises.
Capital flows are reinforcing the picture of elevated risk appetite, with equity funds attracting $32.9 billion during the latest week, while exchange-traded funds accounted for $40.1 billion of inflows. U.S. stock funds alone received $9.6 billion.
The strength was not limited to equities, with investment-grade bond funds attracting $10.2 billion and high-yield corporate bond funds recording $4.1 billion of inflows, their strongest weekly intake in more than two years.
The outlook, therefore, points to broad-based demand for financial assets rather than a narrow rally concentrated in one market segment. That breadth has helped push BofA’s sentiment gauge toward its historical extreme.
Areas to reduce exposure
Against this backdrop, the bank is advising investors to reduce exposure to vulnerable risk assets rather than continue aggressively buying the rally.
BofA’s preferred areas include defensive sectors, bonds and the U.S. dollar. The strategy also highlights consumer staples, real estate investment trusts, small-cap stocks and biotechnology as potential destinations for capital being rotated away from more exposed parts of the market.
The recommendation comes as sectors such as commercial banking, industrials and semiconductor stocks face greater sensitivity to valuations, interest rates and changing economic expectations.
The latest labor-market data adds context to BofA’s warning. Notably, the U.S. economy unexpectedly lost 23,000 jobs in July, versus expectations for an 80,000 increase.
The unemployment rate edged down to 4.1% from 4.2%, while May and June payroll growth was revised down by a combined 103,000 jobs.
Instead of triggering a sell-off, the weak report pushed Treasury yields lower and boosted expectations for Federal Reserve rate cuts, helping the S&P 500 close at a record high.
The reaction highlights BofA’s concern that investors continue to favor stocks despite softer economic data, with hopes for easier monetary policy supporting the risk-on trade.
As things stand, the stock market risk highlighted by BofA is less about predicting the exact timing of a correction and more about recognizing that investor positioning has become unusually bullish.
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