US stocks are facing a severe stress test in June. Bank of America strategist Michael Hartnett warns that a dense cluster of macroeconomic event risks and a sharp withdrawal of market liquidity could drive global bond yields significantly higher, potentially bursting the current technology asset bubble.
According to the report, Hartnett states that the upcoming US Consumer Price Index data is the central catalyst for this "June storm." If the latest inflation figures exceed expectations, it will directly trigger a sell-off in risk assets. Historical data shows that when inflation breaches key warning levels, it has often led to deep corrections in major US stock indices in the subsequent months.
Simultaneously, a flurry of central bank decisions and communications worldwide is steering market direction. The upcoming Federal Open Market Committee meeting, now led by the new Chair, is particularly critical. Its policy stance, whether hawkish or dovish, will determine the fate of US equities and long-term bond yields. Any unexpectedly tight signals could severely impact investors.
Against a backdrop of extremely bullish market sentiment, Bank of America's internal sentiment indicators are flashing a strong "sell signal." Compounded by the unprecedented liquidity drain from imminent mega-tech company initial public offerings, current risk assets are positioned with extremely fragile exposure.
Key Inflation Data Nears, Posing Historic Pullback Risk
The US CPI data scheduled for release on June 10th is the primary test facing the market.
Over the past three months, this figure has averaged a 0.6% month-over-month increase, and 0.4% over the past six months. If May's CPI month-over-month growth exceeds 0.4% (current market consensus is 0.5%), it would imply the US CPI year-over-year rate will break above 4% and potentially head towards 5% before the US midterm elections. This trend would create significant unease for risk assets.
Historical data indicates that over the past century, once CPI has exceeded 4%, the S&P 500 index has on average fallen 4% over the following three months and 7% over six months.
Another inflation indicator that cannot be ignored is the crossover between the unemployment rate and CPI.
There exists a "low-probability but high-impact" possibility for May that the US unemployment rate (consensus forecast 4.3%) could fall to or below the inflation rate (consensus forecast 4.2%). This would mark only the seventh such occurrence since 1960. In years where inflation approached or exceeded unemployment (such as 1966, 1973, 2008, and 2021), the Federal Reserve has typically taken action by raising interest rates, and Wall Street's memories of those years are often painful.
Furthermore, the spread between the unemployment rate and CPI is highly correlated with the US yield curve and is currently pointing towards a near-term curve inversion, another signal with negative implications for risk assets.
Global Central Bank Decisions May End Bond Boom
"Booms and bubbles are ultimately ended by bonds," Michael Hartnett reiterated this logic in the report.
He warns that a series of events in June could push the UK 30-year government bond yield above 6%, the US yield above 5%, and Japan's above 4%. Given that markets are currently crowded with bullish positions and optimistic earnings expectations, such a surge in yields would be unequivocally negative for risk assets.
Global central banks are currently significantly lagging the inflation curve. Among 68 global central banks, 46 currently have inflation levels exceeding their target or the absolute midpoint of their target range. In this context, the European Central Bank has a 98% probability of hiking rates by 25 basis points, while the Bank of Japan's probability for a 25 basis point hike also reaches 83%, as it urgently needs this action to prevent the yen from breaching the "Maginot Line" of 160 per US dollar.
The FOMC meeting led by the new Chair on June 17th is viewed as one of the two most critical events this month.
The market faces a policy dilemma: if the Chair is too dovish, long-term yields could head towards 6%; if too hawkish, the S&P 500 risks a correction towards the 7000-point zone; whereas a "Goldilocks" moderate stance could propel the NYSE Composite Index to a new all-time high above 24,000 points.
As the new Chair noted in 2024, global central banks appear complacent about inflation nearing 3%, with the 2% target no longer being taken seriously—a compromise that is extremely dangerous.
Wealth Effect Fuels Inflation, Extreme Sentiment Triggers Sell Signal
From a macroeconomic perspective, the US is experiencing a K-shaped recovery driven by a "virtuous cycle" of wealth and stock market prosperity.
US household stock wealth has increased by $6 trillion year-to-date, and this "wealth-price spiral" directly intensifies inflationary pressures. Despite economic prosperity, voter sentiment is not uniform, with current inflation approval ratings for one candidate now below the lowest levels seen for another.
Regarding fund flows, investors have recently shown an extreme tendency to chase the tech bubble. Last week's data showed a massive $122 billion flowed into cash, $39 billion into bonds (a record), and $23.1 billion into equities. Concurrently, $2 billion flowed out of cryptocurrencies and $3.1 billion out of gold, indicating investors are selling other assets to chase the technology and semiconductor sectors.
These extreme flows have pushed Bank of America's Bull/Bear indicator from 8.5 further up to 8.7, strengthening the "sell signal" triggered two weeks ago.
Historical data shows that of the 17 "sell signals" since 2002, global equities have on average lost 2% to 3% over the subsequent two to three months, with maximum drawdowns reaching 15% to 20%. Additionally, a global breadth indicator shows 48% of global equity markets are in overbought territory.
Mega IPOs Drain Liquidity, Non-Economic Events Amplify Volatility
Beyond macroeconomic data, the largest non-economic event risk in June stems from massive capital market supply.
The initial public offering for a major space company is set to begin trading next Friday. Combined with offerings from other prominent AI firms and the conclusion of related lock-up periods, this will drain a record amount of liquidity from the market. The market impact of liquidity tightening on this scale could potentially surpass that of central bank decisions.
The historical impact of mega IPOs on markets is mixed. While IPOs for companies like Alibaba and ICBC acted as market catalysts, the listings of Visa and AIA served as markers for market tops, with the S&P 500 and Hang Seng Index experiencing significant declines 9 to 12 months after those IPOs.
On the political front, a global rightward trend provides a new context for the macro environment. With election results in Peru and Colombia this month, the number of governments in Latin America with right-wing economic ideologies will reach 10 out of 19. If Brazil shifts in October, this number would hit its highest level since 2003.
Hartnett believes this political shift is a core reason why Latin American bond yields and spreads are at historic lows (falling to 217 basis points, the lowest since November 2007). A similar trend of political rightward movement is also evident in Europe. For investors, this signifies a profound and substantive reassessment of recent global economic policy preferences is underway.
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