Bank of America Warns Investors to Rotate Into Defensives

Bank of America warned that investor bullishness has reached its highest level since 2021, creating a contrarian signal for markets to sell. The bank's internal Bull and Bear Indicator rose to 9.7, surpassing the sell signal threshold of 8. This surge is driven by expanded stock market breadth, tighter global bond spreads, and strong high-yield bond flows.

Investment strategists at the bank recommend that investors retreat from risk assets, specifically semiconductors, industrials, and banks. They suggest rotating into defensive positions, including the U.S. dollar, biotech, small-cap stocks, real estate investment trusts, and consumer staples.

Despite the warning, U.S. equities have seen annualized inflows on a record pace of $652 billion in 2026. The bank maintains a general long stocks and short bonds stance, citing the wealth effect and AI data-center spending. However, it cautions that a scenario where bond yields rise while bank stocks fall would serve as a critical warning sign for the broader market.