BofA's Hartnett does not believe US stocks at start of 'new bull market'

A top-rated equity strategist at BofA Securities cautioned clients that he did not believe that Wall Street was starting on a "brand new shiny bull market".

In a research note sent to clients, Michael Hartnett conceded that he had been wrong in his calls during the first half of 2023, but said that the situation still felt like a combination of 2000 and 2008 with a big rally before a "big collapse".

He now saw a maximum 100-150 points of upside left in the S&P 500 before Labor Day on 4 September.

By then, he expected the so-called 'capitulation' in bears to have run its course.

What would be needed for that big collapse?

Hartnett pointed to multiple triggers, including the Federal Reserve "reintroducing fear" by signalling that short-term rates were headed to 6% in order to "crack embedded inflation", by which he meant core CPI running at 5%.

Another factor that was needed were yields on US Treasuries above 4% and inflation-adjusted or real yields at 2% in order to signal tighter financial conditions.

The rate of unemployment also needed to rise past 4% signalling recession.

And what went wrong?

Nominal GDP had remained "super-charged" by fiscal stimulus and the labour market had remained resilient.

On top of that, the regional bank crisis had not led to tigher financial conditions or liquidity drain - quite the opposite.

That easing had been funneled into Artificial Intelligence plays, he added, driving the S&P 500 to 4,200 followed a breakout forcing investors to try and catch up.

He also noted how the US dollar had failed to capitalise on the risk-off sentiment set off by the collapse of lender SVB and the debt ceiling drama.

Indeed, the renewed bear on the dollar even as the Fed was saying "we ain't done" showed that the monetary authority's credibility was "on the ropes again".

A depreciation in the Greenback was in turn bullish for inflation assets such as commodities and international equities.

That would be particularly true for Emerging Market stocks as China, India and Brazil eased policy in the back half of 2023.

"We have missed surge in stocks but capitulation likely complete before July 20-30th FOMC/BoJ/ECB + Q2 EPS; upside risk = China stimulus, downside risk BoJ tightens & hawkish Fed-speak."