Bank of America is telling clients that market optimism has run too far, too fast. The bank's closely watched Bull & Bear Indicator climbed to 9.7 out of a maximum possible 10 this week, up from 9.4, marking its highest reading since 2021 and pushing the gauge deep into territory the bank associates with excessive risk-taking, according to Finbold's reporting on the bank's latest note.
The warning comes as global equities trade near record highs and money keeps flowing into risk assets at a pace the bank considers unsustainable. Equity funds pulled in $32.9 billion over the latest week, exchange-traded funds absorbed $40.1 billion, and U.S. stock funds alone took in $9.6 billion. Even credit markets are showing signs of froth: high-yield corporate bond funds logged $4.1 billion of inflows, their strongest weekly intake in more than two years.
A labor market that isn't matching the mood
What makes the euphoria notable is that it's building against a softening jobs backdrop. The U.S. economy unexpectedly shed 23,000 jobs in July, versus economist expectations for an 80,000-job gain, even as the unemployment rate ticked down to 4.1% from 4.2%. May and June payroll figures were also revised down by a combined 103,000 jobs — a pattern of downward revisions that has historically preceded periods of labor-market weakness becoming harder to ignore.
What the indicator has meant historically
The Bull & Bear Indicator blends hedge fund positioning, equity and bond fund flows, market breadth, and credit market technicals into a single sentiment score. Since 2002, a sell signal from the gauge has triggered 17 times, with global equities historically declining an average of 2% to 3% within two to three months and, in the more severe cases, corrections reaching 15% to 20%. The indicator also flashed a historically elevated reading in January 2026 — its highest since 2018 — shortly before markets saw a bout of volatility, underscoring the bank's track record of catching turning points even when the exact timing is imprecise.
Related: S&P 500 Hits Record High Despite Surprise Jobs Miss
Where Bank of America wants investors positioned
Rather than calling for an outright exit from stocks, the bank is recommending a rotation into defensive corners of the market: consumer staples, bonds, the U.S. dollar, real estate investment trusts, small-cap stocks and biotechnology. On the other side of the ledger, it flagged commercial banking, industrials and semiconductor stocks as the most vulnerable to a pullback given how far positioning has stretched in those sectors. Central banks appear to be hedging in a similar direction — China's central bank has now bought gold for 21 straight months, a defensive posture that predates this week's sell signal but reflects the same underlying caution Bank of America is now voicing about broader risk assets.
