Bank of America’s chief investment strategist warns that with inflation risks mounting and bullish sentiment hitting extremes, the window for profit-taking is in early June.
Bank of America’s chief investment strategist Michael Hartnett is advising investors to prepare for a market pullback, suggesting early June is the opportune time to take profits as key indicators flash warning signs. The bank’s proprietary Bull & Bear Indicator has climbed to 7.6, nearing the 8.0 level that constitutes an official "sell signal."
"The stampede of bulls into stocks and tech stocks may be fully completed in the coming weeks, and early June is the right time to reduce positions," Hartnett wrote in his weekly "Flow Show" report. He pointed to a dense calendar of June events—including an OPEC meeting, the G7 summit, and the first FOMC meeting chaired by Kevin Warsh—as potential triggers for a shift toward caution.
The warning is underpinned by persistent inflation data that has surprised economists. The U.S. Producer Price Index (PPI) for April surged to a 6.0% year-over-year increase, the fastest since 2022, while the Consumer Price Index (CPI) came in hotter than expected at 3.8%. Hartnett’s team calculates that if the recent 0.4% monthly CPI gains continue, the headline figure could cross 5% before the November midterm elections, putting significant pressure on equity markets as the 10-year Treasury yield has already surpassed 4.5%.
Hartnett defines a CPI reading above 4% as the "dragon territory" where risk assets begin to falter. Citing 100 years of market history, he noted that once inflation crosses that threshold, the S&P 500 has historically fallen by an average of 4% over the following three months and 7% over six months.
Extreme positioning and valuation metrics are central to Hartnett's cautious thesis. The bank’s private clients, who manage a collective $4.5 trillion in assets, have increased their equity allocation to a record high of 65.7% while cutting cash to a record low of 9.8%.
This optimism is most pronounced in the technology sector, particularly in semiconductors. The Philadelphia Semiconductor Index (SOX) is now trading a staggering 62% above its 200-day moving average. Hartnett put this deviation in historical context, comparing it to the Mississippi and internet bubbles, noting that the average peak deviation during those historic manias was only 35%.
Recent fund flow data presents a more complex picture. While equities saw strong inflows of $20.5 billion, led by a $24.4 billion allocation to U.S. large caps, investors also poured $28.1 billion into bonds. Investment-grade bonds have attracted $42.2 billion over the past four weeks, the largest such inflow since March 2026.
At the same time, riskier assets are seeing outflows. Cryptocurrencies recorded their largest single-week outflow since February 2026, with $1.3 billion exiting the asset class. Gold, a traditional safe haven, saw inflows of $2.0 billion. This simultaneous demand for both stocks and bonds, coupled with an exit from crypto, suggests that while headline optimism remains high, some investors are beginning to hedge their bets against a potential downturn.
This article is for informational purposes only and does not constitute investment advice.
