Bank of America: Bull & Bear Indicator Jumps to 9.7, Near "Sell" Territory as Liquidity Support Clashes With Midterm Risk

Bank of America's Bull & Bear indicator climbed to 9.7, its highest reading since 2021 and one notch from a "sell" signal, as strong risk-taking collides with widening credit cracks in AI-related names and rising political uncertainty ahead of the U.S. midterm elections. In its August 6 Flow Show, the bank said flows remained robust over the past week: $52.9 billion moved into cash, $32.9 billion into equities and $23.1 billion into bonds. Precious metals posted a fifth straight week of inflows, while crypto funds attracted $600 million. Equity inflows were strong enough to imply an annualized 2026 pace of $652 billion, a record. Bond funds took in $23.1 billion, with investment-grade bonds extending inflows to 18 consecutive weeks; the implied annualized total of $527 billion would also be a record. Cash funds saw $53.7 billion of inflows. Beneath the headline equity bid, positioning showed early signs of rotation. Technology funds recorded their first outflow in six weeks, totaling $7 billion, and a semiconductor ETF saw $2.4 billion leave, also the first outflow in six weeks. Even so, annualized inflows into technology funds remain at a record-high $217 billion. Infrastructure funds posted a $3 billion outflow, the largest since March. Among private clients, Bank of America said assets under management stand at $4.5 trillion, with allocations of 65.7% equities, 17.4% bonds and 9.6% cash. Clients returned to T-bills (largest inflow since April) while selling T-notes, and continued to be net buyers of equities. The Bull & Bear indicator rose from 7.8 to 9.7, driven by heavy inflows into high-yield bonds, tighter spreads in global high yield and AT1 risk bonds, and improving breadth across global equity indices. Strategy: "Retreat or rotate", not re-accumulate Bank of America framed its stance as a "summer retreat or rotation," arguing that liquidity support is cushioning downside but that risk assets look fully priced. It recommends reducing exposure to risk assets or rotating into defensive sectors and hedges, including consumer staples, duration-sensitive assets (REITs, small caps, biotech) and the U.S. dollar. The bank said these exposures can help hedge against tighter financial conditions while also fitting a prevailing market consensus of "no hard landing, no Fed hikes, no AI capex cuts and no Democratic sweep" in the midterms. Policymakers and the "too big to fail" equity market Bank of America argued that policymakers increasingly treat the stock market as "too big to fail," given the economy's dependence on the wealth effect and AI data-center investment. It noted household equity holdings have risen by $7 trillion this year, following a combined $9 trillion increase across 2024 and 2025. The bank reiterated its long-held view that bonds ultimately end booms and bubbles, but said this cycle may require a "higher yields, lower dollar" bond-driven wake-up call to force fiscal adjustment and a rotation from equities into bonds. It flagged "rising yields, falling banks" as a potential early warning signal. Last week's coordinated FX intervention was cited as confirmation of policymakers' willingness to backstop financial conditions. Bank of America added that yield-curve control could become a tool if conditions tighten more than expected, and said bond investors currently show the strongest directional risk appetite. Midterms: the key macro variable for 2H Bank of America called the midterm elections the biggest macro variable in the second half, linking "2020s populism" to fiscal excess and a nominal GDP boom. U.S. nominal GDP has risen 63% over the past six years, from $20 trillion to $32 trillion, it said. It characterized the midterms as a referendum on "populist capitalists" and said Republicans retaining control of the Senate would be market-positive. Based on social-media keyword frequency tracking of Trump policy priorities, the bank said "Iran" and "taxes" moved up in 2026, while "border," "energy" and "economy" moved down. It recommends overweighting consumer stocks, arguing the sector is best positioned to benefit from a shift toward "affordability." It also suggests owning gold as a hedge against the risk of a year-end decline in yields, the dollar and equities if voters ultimately deliver a growth-focused verdict. AI credit spreads and earnings optimism Bank of America noted that credit spreads for AI hyperscale vendors continue to widen. It said the MAG 7 index needs to move back above 50 to remove the risk that "the end of cheap Chinese computing power" could curtail the AI capex boom. The bank also said forward EPS optimism remains strong, citing a 33% increase in 12-month forward EPS driven by $35 billion in tariff rebates over the past three months, reversing a $75 billion EPS shock from tariffs between May and July 2025. Jobs data as a near-term catalyst Employment and profits remain positively correlated, Bank of America said, making July's nonfarm payrolls report a key swing factor. If employment is strong (NFP above 125K and unemployment below 4.1%), it said Warsh could tilt hawkish again at the August 28 Jackson Hole symposium. If employment is weak (NFP below 50K and unemployment above 4.3%), the bank sees a contrarian opportunity to add duration and defensive assets. Bottom line Bank of America said liquidity backstops may limit downside, but with the Bull & Bear indicator at 9.7, much of the upside appears priced in while political and credit risks are building. Disclaimer This article is compiled and interpreted by Chaoxiang Research based on a third-party brokerage research report (Bank of America Securities, August 6, 2026) and publicly available market information. Ratings, price targets, earnings forecasts and related judgments cited reflect the views of the brokerage's analysts and their institution only, and do not represent the views of Chaoxiang Research or constitute investment advice. Markets involve risk; make decisions independently. This article should not be used as the basis for buying or selling any securities.