Investor optimism is at its highest level since 2021. Here’s BofA’s advice for protecting your portfolio

Market optimism has reached record highs, signaling the need to reduce the allocation to risky assets, according to Bank of America strategists. The BofA indicator has recorded the most “bullish” investor sentiment since 2021, Bloomberg reports.

The Bull & Bear Indicator, calculated by BofA, rose from 9.4 to 9.7 points—its highest level since 2021. A team of analysts led by Michael Hartnett attributed this to widespread gains in stock markets, a massive inflow of capital into high-yield debt, and narrowing credit spreads, according to a Bloomberg report citing the bank’s note.

Under these circumstances, BofA strategists are favoring defensive assets. They believe this will help protect portfolios from potential macroeconomic shocks, unexpected changes in monetary policy, and a correction in the AI sector.

“During the summer, we adhere to a ‘Retreat/Rotate’ strategy rather than a ‘Reload’ strategy,” Hartnett emphasized. “We recommend that investors take profits on risky assets and/or shift funds into safe-haven assets, long-term bonds, and the U.S. dollar.”

According to data from EPFR Global cited by BofA, net inflows into U.S. stocks totaled $9.6 billion for the week ending August 5. This trend suggests a high probability that the U.S. stock market will record a record amount of capital raised by the end of the year.

Analysts’ warning about excessive optimism came amid a resurgence in strong demand for semiconductor stocks, Bloomberg notes. Strong corporate earnings reports have eased investors’ concerns about a possible slowdown in the AI rally. As a result, stock indices on both sides of the Atlantic hit new all-time highs this week.

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