Bank of America: The Federal Reserve's hawkish stance shakes the confidence of U.S. stock bulls, leading to unstable market sentiment

According to the Zhitong Finance APP, Bank of America strategist Michael Hartnett stated that the Federal Reserve's hawkish stance, combined with extreme bullish sentiment among stock market investors, has led to a "sudden agitation" in risk appetite.

After the Federal Reserve indicated that inflation has become a focus again and hinted that the pace of interest rate cuts will slow next year, the S&P 500 index is expected to face its worst week in over three months. A monthly fund manager survey released earlier this week by Bank of America showed that the allocation level to U.S. stocks had surged to a record high ahead of the Fed's interest rate decision this week, while the cash allocation level had dropped so low that it triggered signals for stock sell-offs.

Michael Hartnett noted in a report that the breadth of the global stock market remains "frightening," meaning that a relatively small group of the best-performing stocks must "continue to rise" to mask any adjustments taking place beneath the surface. The equal-weighted index of the S&P 500 illustrates this best, having fallen over 1% since hitting a new high at the end of November, while the S&P 500 index itself has declined by less than 3% during the same period.

Michael Hartnett stated that the SPDR S&P Bank ETF, which tracks U.S. bank stocks, needs to remain near the highs of 2022 to prevent investor sentiment from deteriorating ahead of President Trump's inauguration on January 20. He previously indicated that investors should start allocating more funds to markets outside the U.S., such as China and Europe, before Trump's presidency.

As Michael Hartnett issued this warning, the U.S. stock market is about to conclude a strong year. Optimism driven by the resilience of the U.S. economy, the AI boom, and declining interest rates has boosted the U.S. stock market, but following the Fed's hawkish rate cut this week, doubts have been raised about whether the stock market rebound can continue further.

According to EPFR Global data cited by Bank of America, global equity funds attracted the largest inflow of funds ever, reaching nearly $69 billion in the week ending Wednesday; U.S. equity funds also attracted a record inflow of $82 billion. In this regard, Michael Hartnett remarked, "The inflow into all S&P 500 index funds is unusually large, possibly related to the upcoming quarterly rebalancing on December 23."