Michael Hartnett, Bank of America strategist, argues that equities require two exogenous shocks to escape current lofty levels. The first involves a Middle East regime change securing affordable oil supplies, while the second hinges on a Trump-Xi U.S.-China trade deal in April to reduce tariffs and boost Trump’s approval. Without these catalysts, he warns, elevated risk assets face near-term weakness.

Hartnett’s Bull & Bear Indicator remains in “extreme bull” territory at 9.4, signaling overbought conditions. Historical data shows such levels precede median drawdowns of 4.3% for global equities, 5.5% for the S&P 500, and 8.6% for tech-heavy indexes. Yet inflows persist: global equities attracted $35.2 billion this week, with U.S. stocks capturing just $26 per $100 invested—the lowest since 2020. This reflects fading U.S. exceptionalism amid shifting capital flows.

Despite broad market strength, risk appetite signals are mixed. Gold funds saw $1.4 billion outflows, and crypto lost $0.8 billion, suggesting caution in speculative assets. BofA notes record inflows into international equities ($64.6 billion over four weeks) and Korean markets, hinting at regional diversification trends. Meanwhile, profit expectations and positioning remain bearish, creating a disconnect between technical indicators and fundamental sentiment.

Hartnett’s forecast underscores structural market fragility. Even with strong inflows, he stresses that policy shifts—not just technical factors—are critical for sustained rallies. Investors should monitor Middle East geopolitics and U.S.-China trade negotiations as potential turning points for equity valuations.