As stock markets reach new all-time highs, Michael Hartnett, Chief Investment Strategist at Bank of America, has issued a warning: with investors flooding into equities and inflation risks persisting, early June presents a window for profit-taking.
In the latest edition of his weekly "Flow Show" report, Hartnett wrote, "The rush of the bulls into stocks and tech may be fully played out in the coming weeks, making early June a timely moment to reduce positions." He noted that June will see a cluster of key events, including the 7th OPEC meeting, the start of the World Cup, the G7 summit, and the first Federal Reserve FOMC meeting chaired by Kevin Warsh, all of which could trigger market caution.
Inflation data provides direct support for this warning. The U.S. Producer Price Index (PPI) rose 6% year-over-year in April, the fastest pace since 2022, while the Consumer Price Index (CPI) climbed to 3.8% year-over-year, exceeding economists' expectations. Hartnett's team calculates that if the monthly sequential increase of 0.4% seen over the past six months does not slow quickly, U.S. CPI could surpass 5% before the midterm elections in November. This outlook poses clear pressure on equities.
Hartnett defines CPI breaking above 4% as the threshold where risk assets begin to become "restless."
Citing historical data from the past century, he points out that once inflation crosses this threshold, the S&P 500 index has, on average, fallen 4% over the subsequent three months and 7% over six months.
Current inflationary pressures are now widespread, spanning energy, electricity, transportation, commodity prices, and rents, among other areas. Rising inflation expectations have pushed the yield on the 10-year U.S. Treasury above 4.5%, while the 30-year yield has crossed 5%—a level Hartnett previously termed the "Maginot Line."
Bank of America's team predicts that if the monthly sequential increase remains at 0.4%, CPI could reach 5.2% by year-end; even if it slows to 0.3%, CPI would still climb to 4.4% by year-end, both far exceeding the Federal Reserve's 2% target.
The Bank of America Bull & Bear Indicator rose this week from 7.2 to 7.6, nearing the 8.0 trigger line for a "sell signal."
Hartnett's team notes that if global equity inflows reach $15-20 billion over the next two weeks, with about $2 billion each flowing into emerging market bonds and high-yield bonds, and if the May fund manager survey shows cash positions dropping from 4.3% to 3.8%, the indicator could hit the sell signal within two weeks.
Positioning data from private clients 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 allocation has dropped to a record low of 9.8%. Since the low on March 30th, the S&P 500 has rebounded 18%, and the Nasdaq 100 has surged 29%, with the AI boom driving semiconductor and related stocks to repeated new highs.
The SOX semiconductor index is currently trading at a significant 62% deviation above its 200-day moving average. Hartnett compares this level to historical extreme cases like the Mississippi Bubble and the dot-com bubble—the average peak deviation in major historical bubbles was only 35%.
The latest weekly flow data shows bonds attracted $28.1 billion in inflows, equities saw $20.5 billion, cash attracted $5.8 billion, and gold saw $2 billion. Cryptocurrencies recorded a $1.3 billion outflow, the largest single-week outflow since February 2026.
By market segment, U.S. large-cap stocks saw a $24.4 billion weekly inflow, the largest in five weeks; tech stocks attracted $5.4 billion, the largest in three months; and infrastructure funds recorded a $1.5 billion inflow, the largest single-week inflow on record.
Investment-grade bonds have seen cumulative inflows of $42.2 billion over the past four weeks, the largest four-week inflow since March 2026. Treasury inflows have continued for the past three weeks, with a $5.6 billion weekly inflow, the largest in six weeks.
Hartnett's team also notes that historically, within three months of a new Federal Reserve Chair taking office, U.S. Treasury yields have risen by an average of about 50 basis points. If this pattern repeats with Kevin Warsh, the 2-year yield could rise to 4.53% and the 10-year yield to 4.93%.
On the political front, Hartnett cites UK local election data showing that vote shares for non-mainstream parties like Reform and the Greens surged from 3% to 41%, while shares for traditional parties like Labour and Conservatives plummeted from 92% to 54%.
He argues that extreme politics and extreme price movements on Wall Street are echoing each other, and that inflation eroding living standards is the fastest way for those in power 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 asset rotation from chips and commodities to the consumer sector in 2027.
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