Bank of America said in its August 6 Flow Show report that investors should consider a "retreat or rotation" rather than adding exposure, arguing that risk assets now sit in a market shaped by policy backstops on one side and increasingly stretched conditions on the other.
The bank’s Bull & Bear indicator climbed from 9.4 to 9.7, its highest level since 2021 and just one step away from a sell signal. BofA said the latest move came as policymakers showed a clear willingness to protect financial conditions, with last week’s coordinated currency intervention cited as evidence.
Flows stayed strong, but leadership started to crack
Over the past week, equity funds took in $32.9 billion. Annualized, that would put 2026 equity inflows at a record $652 billion. Bond funds added $23.1 billion, with investment-grade debt extending its inflow streak to 18 straight weeks and annualized inflows reaching a record $527 billion. Cash funds drew $53.7 billion.
Elsewhere, precious metals posted a fifth straight week of inflows, while crypto funds saw $600 million come in.
Under the surface, though, the picture was more uneven. Technology funds recorded their first outflow in six weeks, losing $700 million. Semiconductor ETFs lost $2.4 billion, also their first outflow in six weeks. Even so, annualized inflows into tech funds still stood at a record $217 billion. Infrastructure funds lost $300 million, the largest outflow since March.
BofA also outlined positioning among private clients with $4.5 trillion in assets under management. In that group, equity allocation stood at 65.7%, bonds at 17.4%, and cash at 9.6%. Those clients have been moving back into T-bills, in the biggest inflow since April, while selling T-notes and remaining net buyers of equities.
Bull & Bear moved deeper into an extreme zone
BofA said the rise in the Bull & Bear reading was driven by strong inflows into high-yield bonds, tighter spreads in global high-yield and AT1 risk debt, and broader participation across global equity indexes. It also noted that the old version of the Bull & Bear indicator stood at 7.8.
In the bank’s view, that leaves the market in an uncomfortable spot: liquidity support remains in place, but positioning and sentiment have already moved close to extremes.
The call: rotate, don’t reload risk
BofA’s preferred stance for the summer was "retreat or rotate," not a fresh risk-on push. It said investors could either cut exposure to risk assets or shift toward defensive sectors such as consumer staples, duration assets including REITs, small caps, and biotech, as well as the U.S. dollar.
The bank said those allocations would offer protection if financial conditions tighten and would also hedge against a market consensus built on several assumptions: no macro hard landing, no Federal Reserve rate hikes, no cuts to AI capital spending, and no Democratic sweep in the midterm elections.
Policy support is still part of the story
BofA argued that policymakers see the stock market as "too big to fail." Its reasoning was tied to the wealth effect and the AI data-center capital spending boom. Household equity holdings have risen by $7 trillion this year, after increasing by a combined $9 trillion in 2024 and 2025.
The bank said the old logic that bonds eventually end booms and bubbles still holds, but this cycle may need a bond vigilante episode defined by "higher yields and a lower dollar" before fiscal policy is forced to turn and asset allocation starts shifting from stocks to bonds. In that framework, "higher yields and lower bank stocks" would be the warning signal to watch.
BofA described last week’s coordinated currency intervention as a "poor man’s LTCM event," a reference to the Federal Reserve backstop during the 1998 Long-Term Capital Management collapse. The report said that showed a reluctance to allow a sharp tightening in financial conditions. Yield curve control, it added, remains a possible backup tool if tightening becomes more severe than expected. At the same time, the bank said bond investors are currently the group showing the strongest directional risk appetite.
Midterm elections are the key macro variable for the second half
BofA linked the politics of the 2020s to what it called populism, fiscal excess, and a boom in nominal GDP. U.S. nominal GDP has risen from $20 trillion to $32 trillion over the past six years, a 63% increase.
The bank said the midterm elections amount to a referendum on populist capitalists. It viewed a Republican hold on the Senate as supportive for markets. Looking at social media word frequency tied to Trump’s policy priorities, BofA said "Iran" and "taxes" moved up in 2026, while "border," "energy," and "economy" moved down.
From that reading, the bank favored long consumer stocks as a direct beneficiary of Trump’s shift toward "affordability." It also recommended long gold as a hedge against a possible voter verdict on the economy in a K-shaped landscape, one that could pull yields, the dollar, and stocks lower by year-end.
AI spreads and labor data remain central
BofA said credit spreads for AI hyperscalers are still widening. In its view, the Mag 7 index needs to move back above 50 to remove the threat that "cheap Chinese compute" could bring the AI capex boom to an end.
Earnings expectations remain strong. The bank said 12-month forward EPS has risen 33%, helped by $35 billion in tariff rebates over the past three months, reversing a $75 billion tariff hit to EPS from May through July 2025.
Employment and profits remain positively linked in BofA’s framework, making July nonfarm payrolls a key release. If labor data are strong, with NFP above 125,000 and the unemployment rate below 4.1%, Warsh could turn hawkish again at Jackson Hole on August 28. If labor data are weak, with NFP below 50,000 and unemployment above 4.3%, the bank said that would create a contrarian opportunity to go long duration and defensive assets.
BofA’s bottom line was that the midterm elections are reshaping the macro narrative. Liquidity support still offers downside protection, but with the Bull & Bear indicator at 9.7, much of the upside has already been priced in.
Source note
This article is based on Chaoxiang Research’s summary and interpretation of a third-party brokerage report from BofA Securities dated August 6, 2026, combined with publicly available market information. The original text said that ratings, target prices, earnings forecasts, and related judgments cited in the piece were the views of the brokerage analysts and represented only their institution, not Chaoxiang Research, and did not constitute investment advice.
The original article also said market participants should make decisions independently and should not use the report as the basis for buying or selling securities. It was credited to Chaoxiang Research @chaoxiangooo.
