The fervor surrounding artificial intelligence, massive capital inflows, and rising inflation are pushing markets into precarious territory. According to Bank of America's Michael Hartnett, if U.S. CPI surpasses 4%, risk assets typically enter a correction phase. Currently, the semiconductor index's deviation from its 200-day moving average has already exceeded levels seen during the dot-com bubble.
As equity markets reach new all-time highs, Michael Hartnett, Chief Investment Strategist at Bank of America, issues a warning: with investors pouring into stocks and inflation risks persisting, early June presents a window for profit-taking. Hartnett writes in the latest "Flow Show" report that "the stampede of long positions chasing stocks and tech may be fully exhausted in the coming weeks, making early June an opportune time to reduce exposure."
He points out that a series of key events are scheduled for June, including the seventh OPEC meeting, the World Cup opening, the G7 summit, and the first Federal Reserve FOMC meeting chaired by Kevin Warsh. These events could collectively trigger market caution.
Inflation data provides direct support for this warning. U.S. April PPI rose 6% year-over-year, the fastest pace since 2022, while CPI increased 3.8% year-over-year, exceeding economists' expectations. Hartnett's team calculates that if the monthly sequential increase of 0.4% over the past six months does not decelerate quickly, U.S. CPI could breach 5% before the November midterm elections—a prospect that poses significant pressure on equities.
Hartnett identifies CPI breaking above 4% as the critical threshold where risk assets begin to show instability. Citing data from the past century, he notes that once inflation crosses this level, the S&P 500 has historically declined by an average of 4% over the subsequent three months and 7% over six months. Current inflationary pressures are widespread, affecting energy, electricity, transportation, commodity prices, and rents.
Rising inflation expectations have already pushed the 10-year Treasury yield above 4.5%, with the 30-year yield surpassing 5%—a level Hartnett previously termed the "Maginot Line." Bank of America's team forecasts that if monthly sequential gains hold at 0.4%, CPI could reach 5.2% by year-end; even if they slow to 0.3%, CPI would still rise to 4.4%, both far exceeding the Federal Reserve's 2% target.
Bullish sentiment is nearing extreme levels, with several indicators flashing warnings. The Bank of America Bull & Bear Indicator rose this week from 7.2 to 7.6, approaching the 8.0 threshold that triggers a "sell signal." Hartnett's team notes that if global equity inflows reach $15-20 billion over the next two weeks, alongside approximately $2 billion each into emerging market bonds and high-yield bonds, and the May fund manager survey shows cash allocations dropping from 4.3% to 3.8%, the indicator could hit the sell signal within two weeks.
Positioning data from the private client segment also reflects extreme market optimism. Bank of America's private clients, who manage $4.5 trillion in assets, have increased their equity allocation to a record high of 65.7%, while cash allocations have fallen to a record low of 9.8%. Since the March 30 low, the S&P 500 has rallied 18%, and the Nasdaq 100 has surged 29%, driven by AI enthusiasm pushing semiconductor and related stocks to repeated highs. The semiconductor index SOX is currently deviating from its 200-day moving average by a significant 62%. Hartnett compares this level to historical extremes like the Mississippi Bubble and the dot-com bubble—historical bubble peaks averaged a deviation of only 35%.
Latest weekly flow data show bonds attracted $28.1 billion in inflows, equities saw $20.5 billion, cash drew $5.8 billion, gold attracted $2 billion, while cryptocurrencies experienced $1.3 billion in outflows, the largest weekly outflow since February 2026. By market, U.S. large-cap stocks saw a weekly inflow of $24.4 billion, the largest in five weeks; tech stocks attracted $5.4 billion, the largest in three months; and infrastructure funds recorded a historic weekly inflow of $1.5 billion. Investment-grade bonds have seen cumulative inflows of $42.2 billion over the past four weeks, the largest four-week inflow since March 2026, while Treasuries have seen inflows for three consecutive weeks, with a weekly inflow of $5.6 billion, the largest in six weeks.
Hartnett's team also notes that historically, within three months of a new Federal Reserve Chair taking office, Treasury yields have risen by an average of about 50 basis points. If this pattern repeats with Kevin Warsh, the 2-year Treasury yield could rise to 4.53%, and the 10-year yield could climb to 4.93%.
On the political front, Hartnett cites UK local election data showing that support for non-mainstream parties like the Reform Party and the Green Party surged from 3% to 41%, while support for traditional parties like Labour and the Conservatives plummeted from 92% to 54%. He argues that extreme politics mirrors extreme price movements on Wall Street, and the erosion of living standards by inflation is the fastest way for incumbents to lose voter support—Trump's approval rating on inflation has fallen to 30%, nearing lows seen during the Biden era.
Hartnett warns that this slow-burning fuse could trigger a massive sector rotation from chips and commodities to consumer stocks by 2027.
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