BofA strategist sees year-end equities rally, risk of recession

Technical factors no longer stand in the way of a year-end rally in the S&P 500 index, according to Bank of America Corp.’s Michael Hartnett.

The bank’s in-house sentiment gauge, the Bull & Bear Indicator, is flashing a contrarian buy signal for a third straight week amid poor equity market breadth — a reference to the number of stocks rising — and large outflows from high-yield and emerging-market bonds, the strategist wrote in a note. The indicator has slid to 1.4, below the 2 level that BofA says implies a buy signal.

With oil under $100 a barrel, yields below 5% and S&P 500 trading above the 4,200 level, positioning could pick up again, said Hartnett, who has been pessimistic on risk assets throughout this year. “But note, everyone now expects a big year-end rally,” he added.

Another team of BofA strategists earlier this week said a contrarian indicator from the bank is also close to offering a buy signal, with its current level implying a 15.5% price return for the S&P 500 over the next 12 months.

After slumping over the past three months, the S&P 500 is set for the best week in a year, lifted by an oil price retreat and hints from Federal Reserve Chair Jerome Powell that the US central bank may be finished with the most aggressive tightening cycle in four decades. Last week, the index briefly dipped below 4,200, seen as a key support level by traders, before a pullback in bond yields allowed it to rebound.

“Lower oil a huge win for central banks, now cutting rates at fastest pace since Aug 2020,” Hartnett wrote, referring to 30 rate cuts from global central banks over the past 3 months. Oil being flat since the start of the Israel-Hamas war is “telling you the world is closer to recession,” he added.

Nonetheless, investors continued to pour money into safe-haven cash funds during the week through November 1. Flows of more than $64 billion in the latest week took annualized inflows to $1.3 trillion, according to EPFR Global data cited by Hartnett. Equity funds had $3.4 billion pulled out while bonds enjoyed inflows for the fourth straight week, absorbing $4.5 billion.