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Bank of America’s top investment strategist, Michael Hartnett, believes the market could plunge much lower if fears about a “bad Q2” earnings season come to fruition.
“Many think bad Q2 EPS elicits bounce in stocks; but if bad news = bad news expect proper capitulation,” Hartnett warned in a research note to clients on Friday.
In the week to Wednesday, stocks registered outflows of $2.9 billion while $1.6 billion went into bonds and $15.1 billion to cash. As far as YTD flows are concerned, stocks are up $181 billion, while bonds and cash have registered heavy outflows — -$206 billion and -$199 billion, respectively.
“Everyone bearish stocks but few have sold,” Hartnett added.
As far as sectors are concerned, the week also saw the largest 5-week outflow in bank loans since April 2020, the 16th week of outflows from financials, the largest inflow from utilities in 8 weeks, the 7th week of consumer outflows, and the 4th week of resources outflows.
In the meantime, the BofA Bull & Bear Indicator remains “max bearish” at 0.
“Risk for consensus of shallow recession + shallow recession kills inflation allowing Fed pivot is that real policy rates still so negative (-6.7% Fed, -8.8% ECB, -6.1% BoE, -2.5% BoJ); fresh, big rate hikes as central banks play catch up in coming months risks “recession shock” morphing into credit event (as US$ heavily hints at),” Hartnett concluded.
