The stock market is ripe for profit-taking in early June due to investors crowding into equities and rising inflation risks, according to Bank of America Corp. strategists.
Growing price pressures are having a broad impact in the U.S., from energy and transportation costs to rents, the team led by Michael Hartnett wrote. That's coming at a time the market is soaring to fresh record highs.
Added to that, a series of key dates next month have the potential to spur caution in equity markets. They cited the next OPEC gathering, the start of the World Cup, the G7 summit, and the first Federal Reserve FOMC meeting under Kevin Warsh as catalysts.
"Bull capitulation into stocks and tech likely fully complete in next few weeks, early June ripe for taking some off table," Hartnett said.
Inflation data showed a strong acceleration in April. U.S. wholesale inflation rose to 6%, the fastest pace since 2022 on a war-driven increase in energy prices that's feeding into higher freight transportation costs. The consumer prices reading also exceeded economists' estimates at 3.8%.
For Hartnett and his team, U.S. CPI is on course to exceed 5% by November's midterm elections unless the 0.4% monthly gains of the past half year slow rapidly. It's a setup that doesn't bode well for stocks.
A scenario where CPI climbs above 4% is "where risk assets get twitchy," Hartnett said. Based on data from the past past 100 years, once inflation crosses that threshold, the S&P 500 has fallen 4% on average in the three months that follow, and 7% over a six-month time frame.
Inflation concerns have pushed 10-year Treasury yields above 4.5%, and the 30-year equivalent beyond 5%, a threshold Hartnett labeled "the Maginot line," in a previous note.
Investors have shown strong appetite for U.S. equities as global stocks rebounded from their Iran war lows, with a renewed artificial intelligence frenzy pushing semiconductors and related stocks to records.
Since their bottom on March 30, the S&P 500 and the Nasdaq 100 have rallied 18% and 29%, respectively. BofA's private clients, with $4.5 trillion in assets under management, have a record-high allocation to stocks at 65.7%, while their cash levels at 9.8% are the lowest ever.
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