(Bloomberg) — Investors flocked back to stocks at the fastest pace in about eight months on signs of easing inflation, but strategists at Bank of America Corp. they warn that the rally will collapse due to risks to earnings and aggressively aggressive central banks.
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Global exchange-traded funds saw inflows of $22.9 billion in the week to Nov. 16, according to a bank note citing data from EPFR Global. A slower-than-expected US inflation report last week initially fueled bets that the Federal Reserve could signal a slowdown in the pace of rate hikes.
But stock market moves since then have been muted as Fed officials indicated more room to raise interest rates before seeing a significant slowdown in consumer prices. Bank of America strategists led by Michael Hartnett said they only expected a policy change in June or July and that expecting any easing before then would be a “big mistake”.
Absent an earlier change in the Fed’s approach, “a fair bit of the bear market rally is behind us,” they wrote in a Nov. 17 note.
Market volatility has calmed after wild swings earlier this year. The S&P 500 Index has now gone five straight sessions without closing even 1% higher or lower for the first time since January, and traders expect swings to narrow further in the coming weeks.
Morgan Stanley’s Wilson sees a tough run for stocks in 2023
The outlook is again downbeat for next year as market strategists including Michael Wilson at Morgan Stanley warn of weaker corporate earnings fueling more stock losses before a recovery in the second half. The Bank of America team also said earnings would remain “ironically” under pressure even as inflation recedes. They recommend holding bonds in the first half of 2023, with equities becoming more attractive in the last six months of the year.
Global bond funds had inflows of $4.2 billion in the week, while $3.7 billion was withdrawn from cash, Bank of America data showed. In Europe, stock buybacks hit a 40th straight week — the fastest pace on record, according to the note.
By style, US large cap, small cap, value and growth saw additions. Technology and healthcare led sector inflows, while communications services, utilities and real estate had small outflows.
–With assistance from Thyagaraju Adinarayan, Jessica Menton and Matt Turner.
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