Risk premium falls to 20-year low! Bank of America warns of market blind optimism, recommends reducing holdings in AI semiconductor and cyclical stocks.

Sebastian Redler, head of European stock strategy at Bank of America, stated that the stock market has underestimated the growing risks facing the global economy, with disruptions in energy supply exacerbating the fragility of economic prospects. Redler pointed out that despite the global economy showing unexpected resilience to several major shocks between 2022 and 2026, and not collapsing as anticipated, this has led to investor complacency. Currently, even though disruptions in energy supply pose a substantial threat to global growth prospects, market participants tend to inertia as they ignore such negative signals and fall into a collective blind spot regarding potential vulnerabilities. Redler emphasized, "The market is actually saying, 'This is the environment with the lowest macroeconomic risk in the past 20 years.' The risk premium is extremely sensitive to the momentum of global economic growth, and the market believes that this situation is unlikely to lead to a weakening of economic growth momentum, with a probability as high as 90%." In Redler's view, historical evidence has consistently shown that if large-scale energy shocks cannot be reversed in the short term, it will inevitably lead to a sudden drop in demand on a global scale. He particularly cited the sharp decline in the global Purchasing Managers' Index (PMI) in March as a warning signal, criticizing the market for currently only seeing it as a mild emotional fluctuation. He further analyzed that investors generally have a psychological expectation of "it's impossible for something to go wrong," which has led to defensive assets in Europe being neglected for a long time. Redler took a contrarian position on this and believed that the momentum of global economic growth will suffer its first substantial blow since 2022 within the next year, and this "demand destruction" will completely shatter the current market stability expectations. Regarding the current asset allocation, Redler made a bold tactical recommendation to significantly reduce exposure to semiconductor sectors related to artificial intelligence and cyclical industries such as mining. He explained that these sectors are currently at multi-year valuation highs relative to the broader market, and once market risk premium forces rise again, these popular sectors at their highs will face significant valuation correction pressure. At the same time, he believed that there was a significant pricing error in the credit market, and that the spread of US high-yield bonds needed to widen by at least another 100 basis points to truly reflect the current credit risk. By suggesting that investors reduce exposure to cyclical stocks in exchange for higher risk premium, Redler is actually betting on an upcoming market repricing wave driven by high energy costs and shrinking demand. It is understood that in recent years, with a slight increase in European stock markets, Redler has been one of the more cautious analysts in the European stock market. At the time of his comments on Monday, European stocks were struggling to continue their four-week winning streak, which had not been achieved yet, and US stock index futures also suggested that the S&P 500 index may pull back from its historical highs.