Wall Street should brace for a big collapse after recent rally, warns Bank of America analyst

As Wall Street entered a new bull market last week, a prominent analyst isn’t convinced the good times will last.

On Friday, Bank of America chief investment strategist Michael Hartnett wrote in a note that he didn’t believe this was the start of a “bright new bull market,” but that stocks were headed ” a great rally before a great collapse”.

However, persistent bear Hartnett admitted in the note that his pessimistic predictions for the first half of 2023 have proven wrong, with the S&P 500 up more than 15% year-to-date.

The benchmark entered bullish territory on June 8, when it recorded a gain of more than 20% from recent lows seen in mid-October.

But Hartnett warned investors to beware of three warning signs for the markets: further rate hikes from the Federal Reserve, rising Treasury yields and an unemployment rate that exceeds 4%.

Traders work on the floor of the New York Stock Exchange. As Wall Street entered a fresh bull market last week, a prominent analyst isn’t convinced the good times will last

Wall Street’s recent rally was driven primarily by tech megacaps and excitement around artificial intelligence.

But fears of missing out on a broader rally are pushing once dodgy investors back into the market.

Many of those who had reduced their equity holdings during the painful decline of 2022 are shifting gears and returning to buy mode.

The National Association of Active Investment Managers’ Exposure Index last week hit its highest level since the end of 2021, while cash levels of global fund managers surveyed this month by Bank of America fell to their lowest level since January 2022.

Positioning among discretionary investors, a cohort that includes fund managers and retail investors, rose above neutral at the start of the month for the first time since February, according to Deutsche Bank data.

Meanwhile, options investors are buying call options – betting that stock prices will rise in the future – to levels not seen in years.

A record 1.8 million S&P 500 calls traded on Thursday, helping lift the one-month moving average of put calls to the highest in at least four years, according to data from Trade Alert.

On Friday, Bank of America chief investment strategist Michael Hartnett wrote in a note that he doesn’t believe this is the start of a “shiny new bull market.”

Wall Street’s recent rally was driven primarily by tech megacaps and enthusiasm for artificial intelligence, as well as easing fears of a recession.

“If you’ve fought this market, you’re most likely exhausted,” said Emily Roland, co-head of investment strategy at John Hancock Asset Management, which has increased overall equity allocations.

The latest market gains were also fueled by the resilience of the US economy, which has so far avoided recession despite the Federal Reserve aggressively tightening monetary policy to fight inflation.

Now, some Wall Street banks are revising their forecasts for high stocks.

Among the latest is Goldman Sachs, whose strategists raised their year-end target for the S&P 500 to 4,500 from 4,000, citing expectations that the economy should avoid a slowdown over the next 12 months.

The index ended Friday at 4,409.59, up 23% from its October lows.

Willie Delwiche, investment strategist at Hi Mount Research, said improving sentiment is poised to support stocks, provided it doesn’t get too extreme.

“Moving from pessimism to optimism is actually what gives bull markets the lifeblood,” he said. “You run into problems when you get to excessive levels, but…we’re not there yet.”