BofA's Hartnett admits 'bears like us have been wrong,' sees these conditions ahead

Published Fri, Jun 16 202311:05 AM EDTUpdated Fri, Jun 16 202312:24 PM EDT

Bank of America chief investment strategist Michael Hartnett has joined his colleagues in admitting he was too pessimistic in his outlook for stocks this year. In his weekly note to clients examining the flow of money through the market, Hartnett took a jab at himself, labeling his outlook the product of "A Bear of Very Little Brain." Further, he outlined several reasons why "bears like us have been wrong" in the first half of 2023. Essentially, he chalks up the miss to three factors: "Goldilocks" economic conditions taking hold, muted contagion from the March collapse of Silicon Valley Bank and other institutions, plus the ability of major artificial intelligence companies to carry the market to powerful gains. On the economy, "nominal GDP remained super-charged by fiscal stimulus/war, labor" while the labor market was "impervious to monetary policy in post-pandemic world," Hartnett wrote. On the banking issues, the SVB collapse "threatened [a] credit crunch but was deftly averted by Fed & US Treasury emergency liquidity program, there was no [quantitative tightening], no liquidity drain, quite the opposite." Those Federal Reserve and Treasury programs that backstopped the banks caused money to be "routed into the new secular growth theme of AI (then internet)" and then "investors [were] forced to play catch-up as hard landing risks evaporate." While Hartnett and BofA in general have admitted getting the first half wrong, they also are not overly optimistic about the second half. In a recent note, the bank's top quant strategist, Savita Subramanian, said there are pockets of opportunity in the market, but she left her full-year S & P 500 target unchanged at 4,300, which actually implies about 3% downside from the current level. Likewise, Hartnett said he sees at most, another 100 to 150 points of upside for the S & P 500 against the potential of 300 points to the downside between now and Labor Day. "We are not convinced we [are] at [the] start of [a] brand new shiny bull market," he wrote, adding that it "still feels more like [a] combo of 2000 or 2008, big rally before big collapse." He listed three conditions that can darken the outlook: whether the Fed "reintroduces fear" and projects it could raise its borrowing benchmark a full percentage point to 6%, an additional surge in Treasury yields and the U.S. unemployment rate climbing above 4% from its current 3.7% . Until then, he said, credit spreads can remain low, equities can rise and "investors are likely to chase" gains by rotating from momentum into more contrarian plays. These include deflation, emerging market stocks and "hard-landing plays" such as REITs and commercial real estate, banks, small-cap stocks, oil and China.