BofA warns global equities are overbought as sell signal flashes

Strategists at Bank of America Corp (BofA) said that global equities are displaying an overbought warning, as evidenced by their Bull & Bear Indicator jumping from 9.2 to 9.4, a threshold that still flashes a sell signal for riskier assets.

The strategists led by Michael Hartnett noted that the rise was driven by “strong global stock index breadth, long-only bull positioning, and strong credit market technicals,” which collectively overshadowed recent equity fund withdrawals. 

Hartnett highlighted that the markets are currently in what the bank refers to as an “overbought” area, as 89% of MSCI global stock indexes are trading above both their 50-day and 200-day moving averages. The breadth rule’s 88% trigger level traditionally suggests significant downside risk for equities.

BofA highlights investor flows and market positioning trends

The BofA strategists noted that the stretched stance coincided with investors withdrawing $15.4 billion from equity funds over the week, highlighting heightened caution amid rising stock prices. The MSCI World Index is expected to have its best month since September after reaching an all-time high on January 27.

Hartnett went on to say that BofA’s bull-and-bear indicator continues to reflect “extreme” bullishness among investors because a solid credit market and a wide range of global stock indexes have so far offset equity outflows.

BofA strategists noted that during the week under consideration, investors invested approximately $17 billion in bond funds, $10 billion in money markets, and $6.7 billion in gold, the highest weekly inflow since October. 

Data by sector, energy received its largest inflow since October 2023 at $2.3 billion, while Materials funds reported a record $11.8 billion inflow. In contrast, at the regional level, China equity funds reported a record $60.5 billion in withdrawals for a second consecutive week, which BofA linked to likely “national team” selling.

Meanwhile, flows to U.S. stock funds have resumed. During the week under consideration, $9.2 billion was drawn in. According to the BofA team, citing EPFR Global data, Europe recorded its first outflows in 7 weeks, totaling $400 million.

In the current backdrop, Hartnett reiterated several preferred positioning themes for 2026. He stated he prefers long exposure to bonds, foreign equities, and gold as a hedge against disinflation and possible deleveraging, while maintaining a fundamentally optimistic position on foreign assets, especially China.

Gold remains a core allocation as a hedge against U.S. dollar depreciation, while mid-cap companies are seen as beneficiaries of domestic economic growth. However, strategists remain pessimistic about investment-grade tech credit and the U.S. dollar. 

In the past, a declining U.S. dollar provided a tailwind for non-U.S. equities. However, by region, the U.S. dollar contributed to significant advances in Europe (+6.2%), Canada (+7.7%), and Latin America (+8.2%), while Japan (+3.2%) lagged. In the U.S., value stocks beat growth stocks in the fourth quarter, posting a 3.8% gain, compared with 1.1% for growth stocks.

Fidelity reports global stocks surge amid policy support

On January 21, Fidelity released its first-quarter 2026 economic outlook report. The fund manager revealed that global stocks surged in the fourth quarter of 2025, driven by solid business fundamentals and a positive expansionary environment. 

According to Fidelity, the U.S. Federal Reserve once again cut rates amid signs of softer employment conditions, and the U.S. fiscal package provided an additional tailwind for corporate earnings growth.

The Fidelity report also noted that artificial intelligence (AI) remained a powerful market theme, driven by increased capital spending on AI-related projects. The report stated that although high prices for AI-related equities might not be a problem in the immediate future, they offer no protection against medium-term governmental, economic, and geopolitical challenges. Hedging risks continues to find diversification in fixed income and inflation-resistant assets appealing.

The investment firm further stated that the global and U.S business cycles remain constructive, with U.S. monetary and fiscal easing likely to continue in 2026. Diversification into non-US assets is therefore more appealing, in part due to the likelihood of ongoing dollar weakness.

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