TL;DR
· According to ZeroHedge's translation of the latest BofA Flow Show, the Bull & Bear Indicator rose from 9.4 to 9.7, reaching the highest level since the beginning of 2021.
· Inflows into high-yield bonds, narrowing spreads in global high-yield and AT1 bonds, and improvement in global equity market breadth have collectively driven the overheating reading.
· Stocks and bonds continue to receive net inflows, but technology stocks and semiconductor ETFs saw outflows for the first time in six weeks, and credit risk for AI cloud companies is also rising.
· Hartnett advocates for a short-term "retreat or rotation, rather than adding to positions," but maintains a long-term stance of being overweight equities and underweight bonds.
· The real reversal combo to watch out for is if yields continue to rise while bank stocks start declining.

According to ZeroHedge's translation of the latest BofA Flow Show, Michael Hartnett's tracked Bull & Bear Indicator rose from 9.4 to 9.7, reaching the highest level since the "meme stock bubble" at the beginning of 2021, coming within 0.3 points of the full 10 points.

This indicator reflects not a single asset's movement but the risk appetite formed by fund flows, credit spreads, market breadth, and investor positioning. A reading of 9.7 implies that the market's attitude toward stocks, credit bonds, and other risk assets is nearing a historical extreme.

Faced with this reading, Hartnett's short-term advice is not to chase highs but to have a "summer retreat or rotation, rather than adding to positions."

However, this does not mean he believes the bull market is about to end. Hartnett acknowledges on the one hand that corporate earnings remain the core engine of the bull market; on the other hand, he believes that financial conditions determine whether this engine can continue to drive stock prices. This forms his core stance: tactically shift to caution while still strategically being bullish on stocks.

Bull & Bear Indicator Rises to 9.7, Overall Funds Flow In While Tech Trades Cool

This week, the Bull & Bear Indicator rose, primarily driven by three factors: strong inflows into high-yield bonds, narrowing spreads in global high-yield and AT1 bonds, and improving global equity market breadth.

This indicates that the risk appetite is not only focused on a few U.S. tech giants. Credit bond investors are also continuing to take risks, more stocks are participating in the rise, and the optimistic sentiment is spreading from the stock market to bonds and other assets.

Historical trend chart of the Bull & Bear Indicator. BofA's Bull & Bear Indicator rose from 9.4 to 9.7, reaching the highest level since the beginning of 2021, and significantly surpassing the "extreme bullish" threshold.

This week's fund flows also confirmed this broad-based warming trend. Data shows that there was a $53.7 billion inflow into cash, $32.9 billion into stocks, $23.1 billion into bonds, and $0.9 billion and $0.6 billion inflows into gold and crypto assets, respectively.

Breaking it down, investment-grade bond inflows were $10.2 billion, and at the year-to-date pace, the annual inflow could reach a record $527 billion; high-yield bond inflows were $4.1 billion, the largest since July 2024; U.S. stock inflows were $9.6 billion, with the annualized inflow scale also at a record high.

However, while funds flowed broadly into the market, not all risk assets saw synchronous gains. This week, tech stock funds saw an outflow of $0.7 billion, the first outflow in six weeks; semiconductor ETFs saw an outflow of $2.4 billion, also marking the first net outflow in six weeks.

This implies that the overall market is still embracing risk, but previously overcrowded tech and semiconductor trades have cooled off. The closer the Bull & Bear Indicator is to 10, the more uniformly the market believes that risk assets can continue to rise; and the stronger the consensus expectation, the weaker the ability to withstand unexpected news.

Earnings Still Accelerating, Financial Conditions Nearing the Red Line

Hartnett did not deny the most crucial support for the bull market—corporate earnings.

According to ZeroHedge, the report stated that 12-month forward EPS expectations have been raised by 33%. In the past three months, around $35 billion in tariff refunds have partially offset the $75 billion tariff profit impact from May to July 2025.

As long as corporate earnings continue to rise, it is challenging for the market to immediately peak solely based on overheated sentiment indicators. However, Hartnett also emphasized that while EPS is the engine of a bull market, financial conditions are the gearbox.

In his framework, if gasoline prices rise to $4 per gallon, the USD/JPY rises to 160, or U.S. bond yields rise to 5%, these could be thresholds that the bull market finds it hard to cross in terms of financial conditions.

These variables could suppress risk assets through different channels: a rise in gasoline prices could drag on consumption and increase inflation expectations; a higher U.S. bond yield would raise financing costs and lower stock valuations; a further weakening of the yen could reflect greater pressure on global carry trades and the exchange rate system.

There has also been differentiation within the credit market. On one hand, global high-yield bonds and AT1 spreads have narrowed, indicating a strong overall risk appetite; on the other hand, credit spreads and CDS of mega-scale AI cloud companies remain elevated.

Therefore, Hartnett believes that the signal from the credit market is now more cautious than that from the stock market. Especially as large tech companies continue to expand AI data center investments, bond investors are beginning to reevaluate capital expenditures, cash flow, and financing pressures.

AI mega-scale cloud provider credit spread and Oracle 5-year CDS trend chart. AI cloud provider credit risk remains elevated, with Oracle's 5-year CDS significantly increasing, indicating that the credit market is more cautious about AI capital expenditures than the stock market.

The divergence between the stock and credit markets is currently one of the most notable signals. While stock investors are still trading AI growth and earnings upside, credit investors are beginning to factor in the balance sheet pressure that high capital expenditures may bring.

Therefore, Hartnett's so-called "summer retreat" is more about position recommendations rather than a market crash prediction. He advocates for investors to reduce risk asset exposure or rotate from cyclical sectors such as banks, industrials, and semiconductors to defensive sectors such as essential consumer goods, REITs, small-cap stocks, biotech, and duration assets like the U.S. dollar.

Short-Term Rotation Rather Than Adding to Positions, Long-Term Risk Lurks in the Bond Market

Unlike short-term caution, Hartnett's long-term asset allocation remains "overweight stocks, underweight bonds."

The core reason for this is that the stock market's importance to the U.S. economy and policy is increasing. Following an approximately $9 trillion increase in U.S. household stock wealth in 2024 and 2025, there has been an additional $7 trillion increase since 2026. The economy is increasingly relying on the wealth effect from stock market gains and the AI data center capex boom.

U.S. household stock assets versus BofA Private Client holdings change chart. U.S. household stock wealth continues to rise, further expanding the stock market's influence on consumption, economic growth, and policy choices.

In this context, Hartnett believes that policymakers are increasingly likely to view the stock market as "too big to fail." If financial market pressures escalate rapidly, the government may prevent a tightening of financial conditions from completely ending the prosperity, bull market, or bubble through exchange rate intervention, fiscal adjustments, or other policy tools.

However, "policy backstopping" does not mean the market will not decline, nor does it guarantee that the backstop will be timely and effective. Hartnett also warns that ultimately, it is usually the bond market that ends prosperity and bubbles.

In his long-term framework, the truly dangerous scenario is a rise in yields, a fall in the dollar, bond market pressure forcing a shift in fiscal policy, and driving asset allocation from stocks back to bonds.

He also provided a more intuitive reversal signal: rising yields but falling bank stocks.

Currently, the "rise in bank stocks, rise in yields" is still seen as a combination signaling strong economic and market risk appetite. If yields continue to rise but bank stocks fail to benefit or even start to decline, it could imply that funding costs, credit risk, and economic pressures have outweighed the benefits of rising rates.

Therefore, the Bull & Bear Indicator rising to 9.7 is not a precise sell signal. Historically, the indicator has entered similar extreme ranges in 2004, 2006, 2018, and 2020, but each market reversal point and trigger have been different.

What it truly indicates is that the market has already priced in a lot of optimistic expectations about a soft landing, earnings growth, AI investment, and policy support. As long as EPS continues to rise and financial conditions do not significantly tighten, the rally may still persist. However, as sentiment readings approach maximum levels, the market's cushion for bad news has significantly diminished.

This is also why Hartnett remains "tactically bearish, strategically bullish": unwilling to add to crowded trades in the short term but believing that wealth effects, AI capital spending, and policy choices will continue to support stocks in the long term.

Next, what is more worth watching than the static 9.7 reading are three sets of dynamic changes: whether tech and semiconductor funds continue to flow out, whether AI cloud vendor credit risk further rises, and whether the market will see a reversal combination of "rising yields, falling bank stocks."