BofA warned of bubble risk in equities amid rising investor optimism

The risk of a speculative bubble on the stock market is growing as expectations of interest rate cuts in the US are attracting massive investment flows into equities, says a BofA analyst. So far this year, $164 billion has already flowed into U.S. stocks, one of the best performances in history.

There's a growing risk of a bubble in the stock market amid a massive influx of funds into equities, Bank of America's Michael Hartnett warned in a note to clients that is cited by Bloomberg.

As the U.S. moves closer to reaching trade agreements with China and other partners, tariff wars and geopolitics are less and less of a concern for investors. Instead, they are pricing in a higher probability of a rate cut by the Federal Reserve and waiting to see if Congress passes President Donald Trump's tax cut bill next month, the agency writes.

«A pivot from duties to tax cuts/interest rate cuts» could lead to a high risk of a bubble in the second half of the year and further weakening of the dollar, Hartnett's team at BofA said in a note.

So far this year, $164 billion has already flowed into U.S. stocks. As a result, this year could be one of the top three best years for investment inflows in history, according to a BofA note citing EPFR Global data.

The S&P 500 Index hit a new high new all-time high during trading on June 27, while 10-year Treasury yields fell more than 30 basis points from their May peaks. Swap markets are now expecting the Fed to cut rates four times over the next 12 months.

«The best way to invest is to use a barbell strategy: holding long positions in U.S. growth stocks while simultaneously holding long positions in global value stocks,» Hartnett said in the note. This strategy helps balance risk and return.

Nevertheless, unless there is a bubble around artificial intelligence, the «most likely positive surprise» for U.S. and global equities in the second half of the year will be an acceleration in earnings growth, the team of analysts added.

Retail investors are actively betting on the most volatile and risky segments of the market, ignoring all signals and calls from Wall Street analysts, wrote Bloomberg earlier. 

«This is the beginning of the FOMO [fear of missed profits] phase <...> It's surprising the speed with which investors have rushed back into speculative trades, especially when you remember how pessimistic the market was just a couple months ago, and the general economic uncertainty hasn't gone anywhere,» noted Evercore ISI chief equity strategist Julian Emanuel.

Large investors, on the other hand, are being more cautious and increasing the protection of their portfolios. They fear a sell-off similar to the one that occurred last August. Back then, fears of slowing global economic growth coincided with seasonally low trading volumes, leading to sharp swings in financial asset prices around the world. The situation is similar now: the ceasefire in the Middle East seems fragile, oil prices are fluctuating, and Donald Trump's trade policies are still unpredictable.

This article was AI-translated and verified by a human editor