Bank of America Securities’ latest Flow Show note sets out a market view built around a difficult balance: trim exposure to crowded risk trades in the near term, while maintaining a longer-term preference for equities over bonds on the expectation that U.S. policymakers would resist a severe market downturn.
Chief investment strategist Michael Hartnett described a “summer retreat/rotation” rather than a wholesale exit from markets. The approach follows a sharp rise in the bank’s Bull & Bear Indicator, which climbed to 9.7 from 9.4 — its highest reading since the meme-stock surge of early 2021. Elevated readings have previously appeared in 2018, 2020 and 2021 before sentiment turned sharply weaker within the following year, according to the note.
That history does not establish a fixed timetable for a correction. It does place the current rally in a category where optimism, fund inflows and tight credit markets leave less room for disappointment.
Cash, equities and bonds all drew inflows
Bank of America’s weekly flow data showed money entering nearly every major asset class. Cash funds attracted $53.7 billion, equities drew $32.9 billion and bonds received $23.1 billion. Gold added $0.9 billion, while cryptocurrency funds took in $0.6 billion.
The scale of flows into conventional markets is particularly striking. Annualized inflows into U.S. equities reached $652 billion, a record in the series cited by Bank of America. Investment-grade bond inflows were running at an annualized $527 billion, also a record.
Such broad buying can support asset prices, but Hartnett’s indicator treats the combination of strong flows and narrowing credit spreads as a warning that positioning has become increasingly one-sided. The gauge was lifted by demand for high-yield debt, tighter spreads in global high-yield bonds and additional tier 1, or AT1, bank debt, as well as improving participation across global stock indexes.
AT1 securities are bank bonds designed to absorb losses in stressed conditions. Their performance is often watched as a measure of appetite for higher-risk credit. Tighter spreads in those instruments and in high-yield debt generally indicate that buyers are accepting less compensation for default and liquidity risk.
Credit markets show strain around AI spending
Hartnett identified a more selective warning in credit markets: spreads and credit-default-swap levels had widened for AI hyperscale data-center operators. CDS contracts function as insurance against a borrower defaulting, so rising CDS costs can signal concern about a company’s debt burden or cash-flow outlook.
The note linked the move to heavy share repurchases and weakening cash-flow trends. It also recorded the first net outflow from technology-stock funds in six weeks.
The development complicates a market narrative that has relied heavily on AI-related capital expenditure. Large technology groups and data-center operators have committed substantial sums to computing infrastructure, but the financing of that investment is becoming a more important issue for equity and credit traders. Rising spending can lift earnings expectations and hardware demand, while simultaneously raising questions about balance sheets, funding costs and the pace at which those investments generate cash.
Bank of America said 12-month forward earnings-per-share expectations had risen 33%, describing EPS growth as the engine behind the bull market. Its note attributed part of the increase to approximately $35 billion in tariff refunds during the past three months, compared with about $75 billion in tariff effects between May and July 2025.
Defensive rotation favored over adding risk
For the short term, Hartnett recommended a shift toward defensive exposures, longer-duration assets and the U.S. dollar rather than adding to risk positions. The examples named in the report included consumer staples, real estate investment trusts, small-cap stocks and biotechnology.
The mix reflects a rotation strategy rather than one simple macro bet. Consumer staples and REITs are often treated as more defensive equity exposures; longer-duration bonds tend to benefit when growth expectations or interest-rate expectations fall; and the dollar can gain during periods of financial stress. Small caps and biotechnology, meanwhile, can respond strongly to changes in rates and domestic policy, making them less straightforward defensive trades than staples or government bonds.
For cryptocurrency markets, the report’s $0.6 billion weekly fund inflow indicates that digital assets were still participating in the broader appetite for risk, though on a far smaller scale than equities or bonds. Hartnett did not present cryptocurrencies as a central component of the proposed defensive rotation. Their sensitivity to liquidity conditions means a rapid move into cash, dollars and duration could create a less supportive backdrop for token prices, particularly if the wider equity market weakens.
Labor data could shape the next policy signal
The note set out labor-market thresholds that it said could influence Federal Reserve communication around the Aug. 28 Jackson Hole meeting. In one scenario, July nonfarm payroll growth above 125,000 and unemployment below 4.1% would coincide with a more hawkish message from Kevin Warsh, whom the note described as a potential Federal Reserve chair candidate.
Aweaker outcome — payroll growth below 50,000 and unemployment above 4.3% — would favor duration and defensive positions, according to Bank of America.
The published labor figures produced a mixed outcome. Payrolls came in well below expectations, while unemployment fell to 4.1%. The labor force declined by 264,000 over the period, a detail that can lower the unemployment rate even when hiring is weak. That combination leaves the data less decisive than a simple headline payroll or unemployment number would suggest.
Longer-term equity view rests on policy and wealth effects
Despite its tactical caution, Bank of America retained a longer-run stance of long equities and short bonds. Hartnett tied that position to the role of household wealth in the U.S. economy and to AI investment. The note cited a $7 trillion year-to-date rise in household equity holdings, after gains of $9 trillion in 2024 and another $9 trillion in 2025.
It also pointed to nominal U.S. GDP increasing to $32 trillion from $20 trillion in six years, while federal debt approached $40 trillion. Those figures frame the tension behind the bank’s view: policymakers have strong incentives to limit a disorderly decline in financial assets, but sustained fiscal borrowing can eventually pressure bond yields higher.
Hartnett described the eventual threat to the equity bull market as a “bond vigilante” selloff, where rising yields force a fiscal-policy reversal and lead allocations to move from equities into bonds. His practical market marker was straightforward: rising Treasury yields alongside falling bank stocks.
Gold was identified as a hedge for a more severe tail-risk scenario in which yields, the dollar and equities all decline together before year-end. The note also said a Republican Senate majority after the midterm elections would support markets.
For now, the Bank of America framework leaves traders with a split message: the policy backdrop may continue to support equities over the longer run, but record flows, optimistic sentiment and signs of stress in AI-linked credit argue against treating every risk asset as a fresh buying opportunity.
For more on shifting from risk assets into defensives, explore our fiscal policy guide and its market impact.
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