BofA’s Hartnett says stock market ripe for profit taking in June

For Michael Hartnett and his team, U.S. CPI is on course to exceed five per cent by November’s midterm elections unless the 0.4 per cent monthly gains of the past half year slow rapidly. Photo by Nathan Laine/Bloomberg

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Growing price pressures are having a broad impact in the United State, 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.

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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.

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“Bull capitulation into stocks and tech likely fully complete in next few weeks, early June ripe for taking some off table,” Hartnett said.

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Inflation data showed a strong acceleration in April. U.S. wholesale inflation rose to six per cent, 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 per cent.

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For Hartnett and his team, U.S. CPI is on course to exceed five per cent by November’s midterm elections unless the 0.4 per cent monthly gains of the past half year slow rapidly. It’s a setup that doesn’t bode well for stocks.

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A scenario where CPI climbs above four per cent 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 four per cent on average in the three months that follow, and seven per cent over a six-month time frame.

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Inflation concerns have pushed 10-year Treasury yields above 4.5 per cent, and the 30-year equivalent beyond five per cent, a threshold Hartnett labelled “the Maginot line,” in a previous note.

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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.

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Since their bottom on March 30, the S&P 500 and the Nasdaq 100 have rallied 18 per cent and 29 per cent, respectively. BofA’s private clients, with US$4.5 trillion in assets under management, have a record-high allocation to stocks at 65.7 per cent, while their cash levels at 9.8 per cent are the lowest ever.

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