Investors Risk Sleepwalking Into Selloff: BofA

What You Need to Know

Global equity funds had $44.7 billion of inflows in the past four weeks.
Investors flocking to the equity rally are doing so in direct defiance of the Federal Reserve.

The U.S. stock rally has already gone too far, and investors face brutal declines if economic growth crumbles in the second half of the year, Bank of America Corp. strategists say.

The “most painful trade” is always the “apocalypse postponed,” a team led by Michael Hartnett wrote in a note. The risk is that inflation flares up again over the next few months, and that the U.S. economy faces a deeper recession in the second half of 2023 after staying resilient in the first six months of the year, they said.

Global equity funds had $44.7 billion of inflows in the past four weeks, according to the note, citing EPFR Global data. Stocks have rallied since the start of 2023 on signs of cooling inflation, optimism over China’s reopening and hopes that slower economies will force global central banks to pause hiking rates.

On Friday, data showed employers in the U.S. added more jobs in January than expected, while the unemployment rate fell to a 53-year low, underscoring the resilience of the labor market despite the Federal Reserve’s most aggressive tightening campaign in a generation. U.S. stock futures extended their slump.

Hartnett recommends investors start selling the S&P 500 when it’s over 4,200 points — 0.5% higher from its most recent close. He expects the benchmark to hit its first-quarter highs before Feb. 14.

The strategist was rightfully bearish throughout last year, though his call for a bottom in the first three months of 2023 is yet to materialize.

Several strategists share Hartnett’s view. Morgan Stanley’s Michael Wilson said investors flocking to the equity rally will be disappointed as they’re in direct defiance of the Federal Reserve.