The hawkish pivot by the Federal Reserve combined with uber-bullish sentiment among stock investors has caused risk appetite to be “suddenly twitchy,” according to Bank of America Corp. strategist Michael Hartnett.
The S&P 500 is headed for the worst week in more than three months after the U.S. central bank said inflation concerns are back in focus, signaling fewer interest-rate cuts than anticipated next year.
Before the Fed meeting, allocations to U.S. equities had surged to a record and cash holdings had fallen so low that they triggered a sell signal for stocks, according to BofA’s monthly fund managers survey published earlier this week.
In a note late Thursday, Hartnett wrote that global equity breadth remains “dire,” meaning a relatively small cohort of the best-performing stocks must “keep winning” to mask any ongoing correction beneath the surface.
That’s best illustrated by the S&P 500 Equal Weighted Index, which has dropped more than 7% since a late November record, while the S&P 500 itself fell less than 3% in the same period.
Hartnett said an exchange-traded fund tracking U.S. banking stocks, the SPDR S&P Bank ETF, needs to hold near 2022 highs to prevent investor sentiment from souring ahead of President-elect Donald Trump’s inauguration on Jan. 20.
The strategist has previously said investors should start putting more money into stocks outside the U.S., like China and Europe, before Trump takes office.