Anything For You All: BANK OF AMERICA: Cracks are showing in the case for staying bullish on stocks

BANK OF AMERICA: Cracks are showing in the case for staying bullish on stocks

The bullish case for stocks is starting to show cracks, according to Bank of America Merrill Lynch's chief investment strategist.
A monthly survey of fund managers found that a trade war was now considered the biggest tail risk.
Still, large investors remain "ominously" bullish, the chief investment strategist said.

Cracks are emerging in the case to stay bullish on stocks, according to Bank of America Merrill Lynch.

Topping the list of large fund managers' tail risks — events investors think are unlikely to happen but very well could — is a trade war.

The last time BAML's monthly survey found this to be the case was in January 2017, just before President Donald Trump's inauguration.

More than a year later, Trump is acting on his promise to tighten trade with an "America First" approach, imposing tariffs on steel, aluminum, solar panels, and other US imports.

And according to Reuters, the Trump administration is expected to announce up to $60 billion in tariffs on Chinese imports by Friday, targeting tech, telecoms, and intellectual property.

These actions could trigger a trade war if other countries retaliate by restricting goods they import from the US, like orange juice and motorcycles.

But that's not even the most worrying thing to Michael Hartnett, BAML's chief investment strategist.

"Ominously," he said in a note on Tuesday, investors have yet to act on their fears.

The survey found they remained bullish on global, bank, and tech stocks and were betting against bonds and defensive stocks that could be helpful in a downturn.

As for what's keeping investors bullish, they still expect to profit from earnings growth and low interest rates. In contrast, BAML is forecasting higher volatility, lower corporate bond prices, and peaking stock prices, Hartnett said.

Even as the 10-year yield inches toward the seemingly make-or-break level of 3%, investors said only a 3.6% yield would be attractive enough to move them away from stocks and into bonds. Read »