Bank of America Warns of an ‘Ominous’ Sign for Stocks

  • Expectations for growth in profit fall to 33% from 58%
  • Retreat could lead to risk-off trading behavior among clients

Helen Driver, head of global equities at Aviva Investors Global Services Ltd., examines the global market impact of a strong earnings season and where she sees opportunities in equities. She speaks on 'Bloomberg Markets: European Close.' (Source: Bloomberg)

Money managers who’ve watched the surge in corporate profits take U.S. equities to records are starting to fret about earnings growth, and that’s an “ominous” sign, Bank of America says.

Just 33 percent of managers in the bank’s latest survey say corporate profits will improve, down from 58 percent at the start of the year.

The drop represents a “warning sign for equities over bonds, high yield over investment grade, and cyclical sectors over defensive ones,” chief investment strategist Michael Hartnett wrote in a note Tuesday. “Further deterioration is likely to cause risk-off trades.”

At the same time, a record 46 percent said equity markets are overvalued. Still, positioning by managers is “pro-risk” despite persistently high cash levels. The S&P 500 trades just above 21 times trailing 12-month earnings after touching above 22 in March, about 23 percent higher than the 10-year average.

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