"Bulls" ready to capitulate: BofA saw a good moment to take profits

The beginning of June may become a favorable moment for profit taking on the stock market on the background of record rally of shares and growth of inflation risks, strategists of Bank of America believe. Their opinion is quoted by Bloomberg.

A team of analysts led by Michael Hartnett noted that inflationary pressure in the U.S. is increasing in several areas - from the cost of energy and transportation to rents. At the same time, the U.S. stock market continues to update historical highs, notes Bloomberg.

According to BofA, several events may cause additional caution among investors in June: the OPEC meeting, the start of the World Cup, the G7 summit and the first meeting of the Federal Open Market Committee (FOMC) of the Federal Reserve under the leadership of Kevin Warsh.

"The bullish capitulation in equities and the technology sector is likely to be completely over in the next few weeks, and early June looks like a good time for partial profit taking," Hartnett said.

Inflation data showed a sharp acceleration in price increases in April. Wholesale inflation in the U.S. accelerated to 6% - the highest level since 2022 - amid a war-induced rise in energy prices, which makes freight transportation more expensive. The consumer inflation rate also topped economists' forecasts at 3.8%. According to Hartnett and his team, U.S. consumer inflation could exceed 5% by the midterm elections in November unless the 0.4% monthly price increase seen over the past six months slows sharply. Such a scenario does not bode well for the stock market, analysts add.

A scenario in which inflation rises above 4% makes risk assets particularly sensitive, Hartnett added. Based on data over the past 100 years, once that level is crossed, the S&P 500 Index has declined an average of 4% over the next three months and 7% over six months, the analysts added.

Since the lows of March 30, the S&P 500 index has gained 18% and the Nasdaq 100 has gained 29%. Nevertheless, in morning trading on May 15, yields on 10-year U.S. Treasuries soared above 4.5% and 30-year yields above 5% amid concerns about accelerating inflation. Futures on the S&P 500 fell 1.2%, while futures on the Nasdaq 100 fell 1.8%. Exchange-traded contracts on the Dow Jones lost 0.9%.

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