Bank of America Corp. strategists have issued a warning that the stock market is primed for profit-taking in early June, citing overcrowded investor positions in equities and escalating inflation risks. The team, led by Michael Hartnett, highlighted that growing price pressures are having a broad impact across the United States, from energy and transportation costs to rents, coinciding with the market reaching fresh record highs.
According to the strategists, a series of key events in June could further spur caution among equity investors. These include the next OPEC meeting, the start of the World Cup, the G7 summit, and the first Federal Reserve FOMC meeting under Kevin Warsh. Hartnett noted that "bull capitulation into stocks and tech likely fully complete in next few weeks, early June ripe for taking some off table."
Inflation Data Raises Concerns
Recent inflation data showed a strong acceleration in April, with U.S. wholesale inflation rising to six percent, the fastest pace since 2022, driven by war-related increases in energy prices that are feeding into higher freight transportation costs. Consumer prices also exceeded economists' estimates, coming in at 3.8 percent. Hartnett and his team predict that U.S. CPI is on track to exceed five percent by November's midterm elections unless the 0.4 percent monthly gains of the past half year slow down significantly.
Impact on Risk Assets
The strategists warned that a scenario where CPI climbs above four percent is "where risk assets get twitchy." Historical data from the past 100 years shows that once inflation crosses that threshold, the S&P 500 has fallen an average of four percent in the following three months and seven percent over a six-month period. Inflation concerns have already pushed 10-year Treasury yields above 4.5 percent and the 30-year equivalent beyond five percent, a threshold Hartnett previously labeled "the Maginot line."
Investor Appetite for Equities
Despite these concerns, investors have shown strong appetite for U.S. equities as global stocks rebounded from their Iran war lows. A renewed artificial intelligence frenzy has driven semiconductors and related stocks to records. Since the market bottom on March 30, the S&P 500 and the Nasdaq 100 have rallied 18 percent and 29 percent, respectively. Bank of America's private clients, with $4.5 trillion in assets under management, have a record-high allocation to stocks at 65.7 percent, while cash levels at 9.8 percent are the lowest ever.
