“Everyone is going all-in to go long”! Bank of America: Keep a close watch on the Japanese market—this will be the “canary” warning that a global sell-off is coming

The market has almost formed a “one-sided” bullish consensus—and this is precisely the risk signal that Bank of America is most concerned about.

Bank of America’s latest edition of The Flow Show funding flow report shows that, for the week ending July 8, global stock funds once again attracted $56.6 billion in inflows, and the pace of technology sector inflows is expected to set a new all-time annual record; meanwhile, BofA’s Bull & Bear Indicator remains in an extremely optimistic range of 9.5, and the “sell signal” has been triggered for several consecutive weeks.

Bank of America’s chief investment strategist Michael Hartnett believes the market is currently betting on “four no’s”—the U.S. economy will not hard-land, the Federal Reserve will not raise rates, AI capital expenditures will not be cut, and the Democratic Party will not sweep the midterm elections. These four major consensuses have supported the sustained rise in risk assets, but if any one expectation fails, it could become the fuse that turns the market from boom to bust.

Among all risk-watch indicators, Hartnett specifically singled out Japan. He argues that Japanese bank stocks are still the “canary in the coal mine” for global risk appetite: if Japanese government bond yields rise further rapidly, causing bank stocks to turn from strength to weakness, it likely means global risk assets are entering an adjustment cycle.

The Bull & Bear Indicator stays stuck in the red: “Everyone is fully loaded on longs”

The Bull & Bear Indicator this week remains at 9.5, far above the alert line of 8+ that triggers a “sell signal.” Historical data show that over the past 24 years, this indicator issued sell signals 17 times; afterward, the global ACWI index averaged a decline of 2%-3% over the following 2 to 3 months, with a hit rate of about 60%, and in extreme cases, the maximum drawdown reached 15%-20%.

Looking at the sub-indicators, market sentiment is nearly entirely in an extreme optimistic state: hedge fund positioning is at the 81st percentile; global equity fund flows are at the 88th percentile; bond fund flows are at the 84th percentile; and fund managers’ positioning is even up to the 100th percentile. The only indicator still neutral is global equity market breadth.

At the same time, BofA’s Global Fund Flows Trading Model has also maintained a sell signal for eight straight weeks.

Global capital keeps pouring into stocks; technology stocks may set records

Funds continue to chase risk assets. For the week ending July 8, global stock funds posted net inflows of $56.6 billion, the fourth-largest single-week inflow of the year; among them, technology funds attracted $18.8 billion in a single week. If the current pace holds, the full-year net inflow into technology funds in 2026 would reach $183B, a new all-time high.

Regional fund flows also reflect a rebound in risk appetite: U.S. stock funds regained $25.1 billion in net inflows; China stock funds saw inflows of $9.0 billion, the largest since December last year; and European stock funds have continued to record outflows for the 13th straight week. Meanwhile, investment-grade bonds have registered net inflows for 14 consecutive weeks, and bank loan funds logged their largest single-week inflow since February last year.

Notably, cash has not exited the market. Money market fund size has risen to $7.9 trillion, reaching a new all-time high, and the week still attracted $39.5 billion in inflows—meaning large amounts of capital are chasing risk assets while also keeping plenty of “ammunition” in reserve for new allocation opportunities.

Japanese bank stocks have become the most important early-warning signal in global markets

Compared with U.S. tech stocks, BofA pays more attention to Japan. Hartnett notes that over the past three years, Japan’s 10-year government bond yield rose from about 0.5% to nearly 3%, and Japanese bank stocks gained roughly three times over the same period, becoming one of the strongest-performing sectors globally.

In his view, Japanese bank stocks actually reflect global liquidity and yield conditions. If Japanese government bond yields continue to rise rapidly and begin to suppress bank stock performance, then this change is likely to mean global risk appetite is starting to reverse—and it would become the earliest “canary” signal to show up in global equity market adjustments.

What supports the market rally is the “four no’s”

Hartnett summarizes the current market’s optimistic expectations as the “four no’s.”

First, the U.S. economy will not hard-land, meaning corporate earnings still have support, and capital continues to choose “stay away from bonds and embrace stocks.”

Second, the Federal Reserve will not resume rate hikes at least before the midterm elections, and overall global central banks still lean toward easing. Since the start of this year, global central banks have cumulatively cut rates 34 times, higher than 21 rate hikes.

Third, AI capital expenditures will not be reduced. Market consensus is that global tech giants’ AI capital spending in 2026 will be about $800 billion, rising further to about $1 trillion in 2027—this remains one of the most important supports for tech stock valuations.

Fourth, the Democratic Party will not sweep America’s midterm elections, so there will not be dramatic changes to policies such as fiscal and tax policy.

Once the four consensuses break, the market will face opportunities from reverse trading

Hartnett also emphasized that what is truly worth watching is not what the market currently believes, but which consensuses are most likely to be broken.

If the U.S. economy ultimately shows clear cooling, with nonfarm payrolls continuing to weaken, long-term Treasuries, defensive consumption, high-dividend stocks, and large tech stocks could all once again outperform the market.

If the Federal Reserve is forced to raise rates again, then trading that flattens the dollar and the yield curve will become the main beneficiary direction. Hartnett noted that with both U.S. CPI and the unemployment rate currently around 4.2%, this combination has only appeared a few times in the past century—and afterward, it was almost always accompanied by rate hikes and market turmoil.

If AI capital expenditures begin to contract, it would directly hit the market’s most core investment logic. At that time, software sectors and large tech platforms may have relative outperformance, while the Philadelphia Semiconductor Index (SOX) faces greater valuation pressure. BofA believes that a narrowing of debt financing space, worsening cash flows, and continued layoffs by tech giants could all become early signals that AI investment is cooling.

Political risk also cannot be ignored. If the Democratic Party ultimately sweeps the midterm elections and the Republican Party loses control of the Senate, the market may again price in a scenario of constrained fiscal expansion, a weaker dollar, and falling U.S. Treasury yields.

Risk warning and disclaimer

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