Bank Of America’s Hartnett Warns Market May Be “Overly Optimistic” As Investors Position For A Strong 2026

Bank of America strategist Michael Hartnett, in his latest outlook, observes that market participants are positioning for robust economic growth in 2026, anticipating that interest‑rate cuts, tax relief and tariff reductions will jointly accelerate corporate earnings. At the same time, the firm’s sentiment indicator has climbed to 8.5, triggering a contrarian sell signal for risk assets and suggesting that investor optimism may have reached an extreme that warrants caution against near‑term corrections.

Capital flows underscore the market’s heightened risk appetite. In the most recent week, global equities recorded net inflows of USD 98.2 billion, of which U.S. equities accounted for USD 77.9 billion — the second‑largest weekly inflow on record. Cash‑like assets experienced a substantial withdrawal of USD 43.9 billion, the largest weekly outflow since April. By contrast, the bond market saw modest inflows of USD 7.9 billion and gold attracted USD 3.1 billion. Cryptocurrencies registered an outflow of roughly USD 0.5 billion, the first weekly net withdrawal in about four weeks, though analysts generally expect this to be temporary.

Hartnett argues that the combination of anticipated fiscal and monetary easing materially raises the probability of market gains next year. He highlights a scenario in which CPI falls to 2% and the 10‑year U.S. Treasury yield declines toward 3.5%, under which risk assets would receive meaningful support. The report also flags downside contingencies, including the possibility that global liquidity has peaked, that Federal Reserve rate cuts fall short of the roughly 150 basis points currently priced in (and could be under 80 basis points), and that the Bank of Japan’s policy rate could rise to levels not seen since 1995.

Despite the constructive macro case, the bank’s bull‑bear indicator has moved from 7.9 to 8.5, breaching the threshold that historically signals extreme optimism and a heightened probability of short‑term market pullbacks. Since 2002 this signal has appeared 16 times, with the MSCI ACWI index averaging a 2.4% decline following the trigger. Historical maximum drawdowns after the signal have reached approximately 4% at one month, 6% at two months and 9% at three months, while the potential missed upside in those windows has typically been below 2%. The indicator’s historical hit rate is about 63%, and the two most recent signals in December 2020 and July 2024 did not precede meaningful corrections, underscoring that the signal is informative but not infallible.

Structural vulnerabilities are beginning to accumulate beneath the surface of broadly constructive positioning. Margin‑debt growth continues to outpace market gains, hedge‑fund leverage remains elevated, and momentum strategies have persisted for an extended period. Concentration of investor exposure in AI and technology stocks recalls prior episodes of market structure risk, and cash allocations have fallen to historic lows just as corporate buyback activity enters blackout windows and large buyer support may wane. A further concern is the general rise in global long‑term yields; even with ongoing Fed easing, external forces could push U.S. long yields higher, increasing bond‑market volatility and posing a substantive threat to equity valuations.