Michael Hartnett, Bank of America’s chief investment strategist, has urged caution as several of Wall Street’s most closely watched sentiment indicators suggest markets may be overheating, even as liquidity-driven optimism continues to support risk assets.
At the center of the warning, Hartnett highlighted that Bank of America’s Bull & Bear Indicator has climbed to 8.9, a level historically associated with strong sell signals.
At the same time, the firm’s Fund Manager Survey shows cash allocations near 3.3%, indicating investors are largely fully invested and increasingly exposed to downside risk.
The warning is reinforced by capital flow data where, over the past year, investors have funneled record amounts into investment-grade credit, equity exchange-traded funds, gold, and cryptocurrencies.
The scale and breadth of these inflows point to crowded positioning across asset classes, leaving markets vulnerable if sentiment shifts.
Stretched stock expectations
Equity expectations also appear stretched, with consensus forecasts projecting roughly 14% earnings growth for the S&P 500 this year, an outlook that assumes strong economic expansion despite elevated valuations and heavy positioning. Any disappointment in growth or profitability could pressure equity prices.
“They all scream sell. <…> More downside than upside. <…> Everyone expects boom, but Fed cutting not hiking, Fed restarting QE buying T-bills, and Trump starting QE buying MBS,” Hartnett said
Despite these signals, Hartnett noted that the macro environment is distorting traditional contrarian indicators.
Unlike prior late-cycle periods, the Federal Reserve is cutting interest rates and expanding liquidity through Treasury bill purchases.
In addition, U.S. policy measures are injecting further stimulus into housing and credit markets, reinforcing reflationary conditions.
This combination has created a market that looks extended by sentiment measures but remains supported by accommodative policy.
While the balance of risks for major equity indexes now leans more toward downside than upside, the persistence of easy financial conditions continues to delay a broader risk reset.
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