U.S. stocks experienced the largest weekly outflow in nearly four months, BofA Hartnett: 'Sell signal' still flashing

U.S. stock funds are experiencing their fastest capital outflows this year, while Bank of America Securities' flagship sentiment indicator has risen to extreme bullish territory, with warning signals continuing to flash.

According to the Zhui Feng Trading Desk, based on Bank of America's latest weekly report, for the week ending July 1, U.S. stock funds saw a single-week capital outflow of $17.2 billion, the largest weekly net redemption since March 2026. This marks the second consecutive week of net outflows for U.S. stock funds, signaling a clear reversal from the strong capital inflow momentum seen since the beginning of the year.

Meanwhile, Bank of America's Bull & Bear Indicator further rose from 9.1 to 9.5, remaining deep in the "extreme bullish" zone, and the "sell signal" triggered on May 20 has yet to be lifted.

As capital exits U.S. stocks, investors are turning to investment-grade bonds and high-yield bonds. Investment-grade bonds attracted $17.2 billion in inflows that week, marking a 13th consecutive week of net inflows; high-yield bonds attracted $3.4 billion, the largest weekly inflow since May 2025. From within the stock market, funds continued to concentrate in the tech sector, with tech funds seeing $14.3 billion in inflows that week, and year-to-date cumulative inflows are on track to set a record of $152 billion.

Chip stocks in turmoil, AI valuation concerns amplify sell-off

Against the backdrop of U.S. stock outflows, the semiconductor sector has been under particular pressure. This week, skepticism centered on AI-related overvaluation has continued to impact chip stocks, with the Philadelphia Semiconductor Index falling a cumulative 11% over the past two trading sessions.

JPMorgan strategists pointed out that the extreme outperformance of U.S. semiconductor stocks relative to AI hyperscale cloud companies has created an unsustainable valuation gap, and they expect this gap to eventually narrow.

From a quarterly perspective, the Philadelphia Semiconductor Index surged 88% in the second quarter of this year, the Korea Composite Stock Price Index (KOSPI) rose 64%, the biotech sector gained 24%, small caps rose 21%, and bank stocks increased 17%, with AI-related assets leading globally. However, energy, gold, bitcoin, and defense sectors significantly underperformed over the same period, with oil prices falling 31% and bitcoin dropping 14%.

Bull & Bear Indicator rises to 9.5, "sell signal" persists for six weeks

Bank of America's chief investment strategist Michael Hartnett noted in the latest report that the Bull & Bear Indicator rose from 9.1 to 9.5 this week, with upward momentum coming from increased hedge fund long positions (reducing S&P 500 futures shorts and VIX futures longs), a recovery in high-yield bond inflows, and stock inflows into the tech and healthcare sectors.

The indicator triggered a "sell signal" on May 20, which remains active. Bank of America data shows that since 2002, the indicator has triggered a "sell signal" 17 times, with global stocks averaging a decline of 2% to 3% over the subsequent 2 to 3 months, an accuracy rate of approximately 60%, and a historical maximum drawdown between 15% and 20%.

Breaking down the components, the fund manager survey (FMS) positioning is at the 100th percentile, marked as "extremely bullish"; bond fund flows are at the 85th percentile, also showing "extremely bullish"; stock fund flows are at the 80th percentile, in the "bullish" range; hedge fund positioning is at the 79th percentile, and credit market technicals are at the 77th percentile, all pointing to an accumulation of bullish sentiment.

Capital Rotation: Japanese stocks favored, commodities and gold under pressure

Alongside U.S. stock outflows, some capital flowed to overseas markets, with Japanese stock funds attracting $1.9 billion that week, the largest weekly inflow in nearly seven weeks.

From a broader asset allocation perspective, global stocks saw a net outflow of $13.9 billion that week, with mutual funds redeeming $18.8 billion net and ETFs seeing $5.2 billion in net inflows. Bond markets continued to attract capital, with total inflows of $29.1 billion, marking a 62nd consecutive week of net bond inflows. Money market funds attracted $55 billion that week.

Commodities and gold continued to face pressure. Gold saw a net outflow of $3 billion that week, the seventh consecutive week of outflows, the longest streak since March 2024. Cryptocurrencies saw a net outflow of $2 billion, the largest weekly outflow since November 2025. Energy funds saw outflows of $3.2 billion, the largest weekly outflow since July 2024; materials funds saw outflows of $6.8 billion, the largest since March 2026.

Bank of America Private Clients: Extending duration, reducing equities

Positioning data from Bank of America's Private Client division (managing approximately $4.5 trillion in assets) also revealed cautious signals. In the current asset allocation, stocks account for 65.4%, bonds 17.6%, and cash 9.8%. Over the past week, private clients' net redemptions of equity assets were the largest in nearly four weeks.

On the fixed income side, private clients showed a clear operation of extending duration: U.S. Treasury bills (T-bills) recorded outflows for the fifth consecutive week, while Treasury notes (T-notes) continued to see net inflows. Over the past four weeks, private clients increased holdings of materials, healthcare, and municipal bonds via ETFs, while reducing holdings of Japanese stocks, consumer staples, and financials.

Year-to-date, private clients' equity ETF holdings have grown by 5.4%, but the growth rate has slowed to 0.1% in the past week, indicating a clear cooling of short-term buying intentions.

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