In his latest “The Flow Show” report, Bank of America’s chief investment strategist, Michael Hartnett, continues to express pessimistic views on the stock market.
Contrary to the prevailing bullish sentiment, Hartnett believes that this is not a new ‘shiny bull market’, and that a big rally might be the precursor to a big collapse akin to a combination of the dot-com bubble in 2000 and the financial crisis in 2008.
Hartnett has been quite pessimistic on the market so far this year, arguing that investors should be cautious in light of persistently strong inflation and the possibility of future interest rate hikes. But the market has proven him wrong so far, with the S&P 500 index up 15% and the Nasdaq 100 index up 37.6% this year.
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AI Led The Rally, But Now The Upside Is Contained
The analyst attributes the current rally to factors such as the absence of a recession, no credit crunch, and the booming growth of artificial intelligence (AI).
Hartnett points out that only the ‘Magnificent 7′ stocks – Apple Inc. (NASDAQ:AAPL), Microsoft Corp. (NASDAQ:MSFT), Alphabet Inc. (NASDAQ:GOOG) (NASDAQ:GOOGL), Amazon Inc. (NASDAQ:AMZN), Meta Platforms Inc. (NASDAQ:META), NVIDIA Corp. (NASDAQ:NVDA) and Tesla, Inc. (NASDAQ:TSLA) – have driven the overall market higher creating FOMO among investors as recession risks evaporated.
The expert claimed that AI was an “unexpected event in the first half of 2023,” and that the collapse of Silicon Valley Bank in March was comparable to the Long-Term Capital Management (LTCM) crash in 1998, both of which led to the Federal Reserve easing and liquidity being routed into the new secular growth theme of AI (then the internet).
Hartnett cautions that the S&P 500 may only see a limited upside of 100-150 points from its current levels, while the potential downside risk of a 300 point drop looms before Labor Day.
Chart: Magnificent 7 Up 91%, While S&P 500 Equal Weight Up 5% Year To Date
Hartnett Warns of Positioning Disconnect Between Individual Investor And Fund Managers
Hartnett emphasizes the growing divergence between individual investors and fund managers by highlighting a difference in positioning. Individual investor confidence, as measured by the AAII poll, has reached 19-month highs, indicating widespread optimism.
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However, global fund managers continue to maintain historically elevated cash levels above 5%, demonstrating widespread prudence and caution in chasing the market rally.
Hartnett admits to having missed the surge in stocks but anticipates a potential market correction and a completion of capitulation before July 20-30, coinciding with significant events such as FOMC, Bank of Japan, and ECB meetings, as well as the Q2 earnings season.
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