Savita Subramanian, Bank of America's Head of US Equity and Quantitative Strategy, has noted that market broadening is actively occurring, even as market sentiment is far from euphoric. This perspective from Subramanian comes at a time when Bank of America's internal Bull & Bear Indicator has reached 9.7, its highest level since 2021, up from 9.4. A reading above 8 on this indicator typically signals a sell-off in markets.
Bank of America generally recommends that investors retreat from risk assets and consider rotating into defensive investments. These defensive assets include consumer staples, real estate investment trusts (REITs), small-cap stocks, biotech, and the U.S. dollar. These are seen as less vulnerable compared to banks, industrials, and semiconductors.
The bank's caution also aligns with a significant influx of cash into markets. In the latest week, weekly flows into stocks totaled $32.9 billion, with $40.1 billion flowing into ETFs and $7.2 billion leaving mutual funds. U.S. equities alone attracted $9.6 billion, putting them on an annualized record pace of $652 billion so far in 2026. Tech funds, however, saw $0.7 billion in outflows, their first in six weeks, and semiconductor ETFs experienced $2.4 billion in outflows, although tech inflows are still at an annualized record pace of $217 billion this year.
Despite the broader caution, Bank of America maintains an overall asset-allocation stance of "long stocks, short bonds," driven by the economy's reliance on wealth effect spending from rising equity holdings and the AI data-center capital expenditure boom. However, they warn that a combination of rising bond yields and a weakening dollar could eventually necessitate a shift in asset allocation from stocks to bonds. Another critical warning sign would be rising bond yields coupled with falling bank stocks, which the bank refers to as the "canary in the coal mine."
Separately, other reports indicate that institutional investors have significantly cut their cash positions to 3.5%, triggering Bank of America's contrarian Cash Rule sell signal, one of the lowest levels since 1998. This suggests a "fear of missing out" as managers move into yield-bearing equities and real assets rather than long-duration fixed income. Meanwhile, money market funds held a record $7.75 trillion in May, with some analysts arguing that most of this cash should be reallocated to longer-term investments due to reinvestment risk as interest rates fall.
