The stock market continues to reach new heights, but some experts are warning that the bull run may be in jeopardy. Michael Hartnett, Bank of America’s chief investment strategist, sees substantial danger signs lurking despite strong market sentiment and continued money flow into risk assets. Hartnett noted that the trading range for U.S. stocks is likely to end via lower inflation or weaker growth.
He believes the bigger risk is an unanticipated slowdown in growth due to factors such as a decline in the housing market, waning wealth effect and jobs growth, and inflation impacting consumer confidence. Moreover, Hartnett warns that the U.S. government is heading into a recession. Since President Trump took office, unemployment claims in Washington, D.C., have surged.
Government outlays in 2024 were 52% higher than in 2019, and the deficit as a share of GDP is at 6.3%, a level virtually unheard of during economic expansions.
Hartnett’s warning on market risks
Despite the dangers to the rally, investors continue to allocate money to equities.
Last week, $16.8 billion flowed into stocks, raising the allocation to the highest level since March 2022. Bonds saw inflows of $16.2 billion, while $3.3 billion went to cash. Respondents to BofA’s latest fund manager survey reported holding just 3.5% in cash as a share of assets, the lowest level since 2010.
While getting the U.S. fiscal house in order could alleviate some concerns in the bond market, it also has the potential to disrupt stocks. Hartnett pointed out that the slowdown is starting to be flagged by the outperformance of bond-sensitives and defensive stocks, with staples being the best-performing sector in the past month, up 8%. As the market reaches new highs, investors should be aware of the potential risks and prepare for the possibility of a market downturn.
