Investor optimism has reached its highest level in nearly five years, prompting Bank of America strategists to urge clients to scale back exposure to riskier assets even though stock markets continue climbing to record highs.
Bank of America's closely watched bull-and-bear indicator climbed to 9.7 from 9.4, its strongest reading since 2021, according to a note led by chief investment strategist Michael Hartnett seen by Bloomberg.
Hartnett argued that the latest reading suggests markets have entered a period where caution is warranted rather than a time to add risk. "We remain in summer Retreat/Rotate not Reload camp," Hartnett wrote in a passage of the report. He recommended that investors reduce exposure to risk assets or shift allocations toward more defensive investments, longer-duration assets and the U.S. dollar.
The warning comes as global equities continue to surge, fueled by resilient corporate earnings and renewed enthusiasm surrounding artificial intelligence. Stock indexes in both the United States and Europe reached fresh record highs this week as investors shrugged off concerns that the AI-driven rally might be losing momentum.
Technology shares, particularly semiconductor companies, have been at the center of the latest advance. Strong quarterly earnings from major chipmakers helped reassure investors that demand tied to artificial intelligence infrastructure remains robust, easing fears that the sector's explosive gains were beginning to fade.
The improving earnings picture has extended beyond technology. Solid corporate results across multiple industries in both the U.S. and Europe have reinforced confidence that businesses can continue delivering profits despite elevated interest rates and lingering geopolitical uncertainty.
Bank of America said several market indicators illustrate just how optimistic investors have become. Broader participation across equity markets, heavy inflows into high-yield, or "junk," bonds and tightening corporate credit spreads all point to investors becoming increasingly comfortable taking on additional risk.
While those trends typically reflect confidence in economic growth, Hartnett's team believes they also leave markets more vulnerable to unexpected setbacks. Rather than chasing the rally, the strategists said investors should prepare portfolios for potential disappointments related to the economy, Federal Reserve policy or developments surrounding artificial intelligence, which has been the primary driver of equity gains over the past two years.
The timing of the warning is particularly notable as investors await one of the market's most closely watched economic releases. Friday's U.S. employment report is expected to provide fresh insight into the strength of the labor market and help shape expectations for future Federal Reserve interest rate decisions.
A stronger-than-expected jobs report could complicate the outlook for investors betting on lower borrowing costs. Robust employment data could reinforce expectations that the Fed will keep interest rates elevated for longer, potentially weighing on richly valued growth stocks and other risk assets.
Despite those concerns, investors have continued pouring money into equities. According to Bank of America, citing EPFR Global data, U.S. stock funds attracted a net $9.6 billion during the week ending Aug. 5. The pace of inflows puts the U.S. market on track for a record year of investment.
