Written by: Rita

Bank of America's Bull & Bear indicator has risen to 9.7, the highest since 2021, just one step away from a “sell” signal. In the past week, $52.9 billion flowed into cash, $32.9 billion into stocks, and $23.1 billion into bonds. In a Flow Show report released on August 6, Bank of America pointed out that the policy sector’s intent to support financial conditions is clear, and the recent joint currency intervention validates this judgment. Bank of America referred to this intervention as a “poor man's LTCM event,” alluding to the Federal Reserve's actions during the collapse of Long-Term Capital Management in 1998. However, the Bull & Bear indicator has risen to extreme territory, AI mega-cap credit spreads continue to widen, and uncertainty surrounding the midterm elections is building, which constitutes the core contradiction in the current market. Bank of America’s recommendation is “retreat or rotation,” withdrawing from risk assets or rotating into defensive sectors, duration assets, and the US dollar.

Differentiated Capital Flows: Record Inflows into Stocks but First Outflows from Technology

Last week’s capital flows presented a stark divergence. Stock funds saw inflows of $32.9 billion, with an annualized total inflow for 2026 projected to reach $652 billion, setting a historical record. Bond funds had inflows of $23.1 billion, with investment-grade bonds experiencing inflows for 18 consecutive weeks, hitting an annualized inflow of $527 billion, also a record. Cash funds saw inflows of $53.7 billion. Precious metals have had inflows for five consecutive weeks, and cryptocurrency saw inflows of $600 million.

The technology sector experienced its first outflow in six weeks, amounting to $700 million. Semiconductor ETFs saw outflows of $2.4 billion, also the first in six weeks. However, technology funds still have an annualized inflow of $217 billion, setting a historical record. Infrastructure saw outflows of $300 million, the largest since March. For private equity clients, assets under management reached $4.5 trillion, with stock allocations at 65.7%, bonds at 17.4%, and cash at 9.6%. Private equity clients are returning to T-bills (the largest inflow since April), while selling T-notes, but still net buying stocks.

Bank of America’s Bull & Bear indicator rose from 9.4 to 9.7, the highest since 2021, triggering a “sell” signal. The increase in the indicator was mainly driven by strong inflows into high-yield bonds, narrowing spreads in global high-yield and AT1 risk bonds, and an improvement in the breadth of global stock indices. Bank of America indicated that the previous Bull & Bear indicator reading was 7.8.

Strategic Judgment: Retreat or Rotation, Liquidity Support but Rising Political Risks

Bank of America’s strategic judgment is “summer retreat or rotation,” rather than “re-accumulation.” They recommend withdrawing from risk assets or rotating into defensive sectors (consumer staples), duration assets (REITs, small-cap stocks, biotechnology), and the US dollar. These assets can hedge against the risk of tightening financial conditions and are defensive against the consensus expectation of “no macro hard landing, no Fed rate hikes, no AI capital expenditure cuts, and no Democratic sweep in the midterm elections.”

Bank of America believes that the policymakers view the stock market as “too big to fail.” The economy relies on the wealth effect (household stock holdings have increased by $7 trillion this year, with a total increase of $9 trillion in 2024 and 2025) and the boom in AI data center capital expenditures. The logic of ending the boom and bubble in bonds remains valid, but this time it requires a “higher yield-lower dollar” bond vigilante event to force a shift in fiscal policy and an asset allocation shift from stocks to bonds. “Rising yields and falling banks” will be the canary in the coal mine.

The recent joint currency intervention validated the policymakers' willingness to support financial conditions. Bank of America believes that yield curve control is an alternative tool. If financial conditions tighten beyond expectation, policymakers may resort to this tool. Currently, bond investors exhibit the strongest directional risk appetite.

The Midterm Elections are the Biggest Macroeconomic Variable in the Second Half of the Year

Bank of America asserts that the political populism of the 2020s equals fiscal excess equals nominal GDP boom. The United States’ nominal GDP has risen from $20 trillion to $32 trillion over the past six years, an increase of 63%. However, the midterm elections act as a referendum for populist capitalists. The Republican retention of a Senate majority would be favorable for the market. The frequency of social media terms related to Trump's policy priorities shows an increase in “Iran” and “taxes” for 2026, while “border,” “energy,” and “economy” have declined. Bank of America recommends going long on consumer stocks, which are the best beneficiaries as Trump shifts towards “affordability.” They also suggest going long on gold to hedge against the K-shaped economic voters who might deliver the judgment of “dummy, the problem is the economy” in the midterm elections, potentially triggering declines in yields, the dollar, and stocks by year-end.

The credit spreads of AI mega-cap firms continue to widen, and Bank of America believes that the Mag 7 index needs to return to above 50 to eliminate the threat of “China’s cheap computing ending the AI capital expenditure boom.” Current EPS optimism is high, with the forward EPS 12 months rising by 33%, benefiting from $35 billion in tariff rebates over the past three months, which reversed the $75 billion EPS tariff impact from May to July 2025. Employment is positively correlated with profits, and the July non-farm payroll data will be a critical variable. If employment is strong (NFP exceeds 125,000, unemployment rate below 4.1%), Warsh may pivot back to hawkish at Jackson Hole on August 28; if employment is weak (NFP below 50,000, unemployment rate above 4.3%), it would represent a contrarian opportunity to go long on duration and defensive assets. The midterm elections are reshaping the macro narrative, with liquidity support providing downside protection for the market, but the Bull & Bear indicator rising to 9.7 indicates that the upside potential has been fully priced in.

Disclaimer

This article is a整理 and interpretation of third-party brokerage research reports (Bank of America Securities, August 6, 2026) by潮向研究, combined with整理 of publicly available market information. The ratings, target prices, earnings forecasts, and related judgments quoted in the article are the views of the analysts at that brokerage, representing only their institution's stance and do not represent the views of潮向研究, nor do they constitute any investment advice.

The market carries risks, and decisions should be made independently. This article should not be used as a basis for buying or selling any securities.