© Reuters. Bad Q2 Earnings Could Yield ‘Proper Capitulation’, BofA’s Michael Hartnett Warns

By Senad Kararahmetovic

Bank of America’s top investment strategist, Michael Hartnett, believes the market could plunge much lower if fears about a “bad Q2” earnings season come to fruition.

“Many think bad Q2 EPS elicits bounce in stocks; but if bad news = bad news expect proper capitulation,” Hartnett warned in a research note to clients on Friday.

In the week to Wednesday, stocks registered outflows of $2.9 billion while $1.6 billion went into bonds and $15.1 billion to cash. As far as YTD flows are concerned, stocks are up $181 billion, while bonds and cash have registered heavy outflows — -$206 billion and -$199 billion, respectively.

“Everyone bearish stocks but few have sold,” Hartnett added.

As far as sectors are concerned, the week also saw the largest 5-week outflow in bank loans since April 2020, the 16th week of outflows from financials, the largest inflow from utilities in 8 weeks, the 7th week of consumer outflows, and the 4th week of resources outflows.

In the meantime, the BofA Bull & Bear Indicator remains “max bearish” at 0.

“Risk for consensus of shallow recession + shallow recession kills inflation allowing Fed pivot is that real policy rates still so negative (-6.7% Fed, -8.8% ECB, -6.1% BoE, -2.5% BoJ); fresh, big rate hikes as central banks play catch up in coming months risks “recession shock” morphing into credit event (as US$ heavily hints at),” Hartnett concluded.

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