Bank of America says investor bullishness has climbed to its highest level in nearly five years and is a contrarian warning for markets. As financial conditions tighten owing to the backup in bond yields, the bank recommends investors “retreat from risk assets and/or rotate into defensives,” including consumer staples, real estate investment trusts, small cap and biotech stocks, along with the U.S. dollar . These investments could be less vulnerable than banks, industrials and semiconductors, according to the bank’s investment strategists. The bank’s internal “Bull & Bear Indicator” just rose to 9.7, its highest reading since 2021, from 9.4, fueled by strong high-yield bond flows, tighter spreads on global high-yield and Tier 1 bonds along with a stronger global stock market breadth. Any sentiment reading above 8 is a sell signal and a reading below 2 is buy signal, Bank of America says. Bank of America’s caution comes at a time when cash is pouring into markets. Weekly flows totaled $32.9 billion into stocks in the latest week, comprised of $40.1 billion into ETFs and $7.2 billion leaving mutual funds. U.S. equities attracted $9.6 billion, putting inflows at an annualized record pace of $652 billion so far in 2026. Weekly inflows included $53.7 billion into cash and $23.1 billion into bonds, while gold and crypto attracted $0.9 billion and $0.6 billion, respectively. In fixed income, investment-grade bonds attracted $10.2 billion, or an annualized record inflow of $527 billion this year, while high-yield bonds drew $4.1 billion, their biggest weekly inflow since July 2024. Bank loans added another $1.4 billion, with annualized inflows on pace for their best year since 2021. There were some signs of cooling in crowded trades, such as tech funds losing $0.7 billion, their first outflow in six weeks. Semiconductor ETFs similarly saw $2.4 billion in outflows. Nevertheless, tech inflows are running at an annualized record pace of $217 billion this year, Bank of America said. The bank’s broader asset-allocation stance remains “long stocks, short bonds,” as the economy continues to depend wealth effect spending from rising equity holdings and the AI data-center capex boom. But a combination of higher bond yields and a weaker dollar could eventually force a shift in asset allocation from stocks to bonds, according to Bank of America. Another warning sign would come from rising bond yields alongside falling bank stocks. “‘Up-in-yields, down-in-banks’ will be the canary in the coal mine,” the bank said.
