- The bullish case for stocks is starting to show cracks, according to Bank of America Merrill Lynch (NYSE:BAC)'s chief investment strategist.
- A monthly survey of fund managers showed a trade war is now considered the biggest tail risk.
- Still, large investors remain "ominously" bullish.
Cracks are emerging in the case to stay bullish on stocks, according to Bank of America Merrill Lynch.
Top of the list of large fund managers' tail risks — events investors think are unlikely to happen but very well could — is a trade war.
The last time BAML's monthly survey showed this as the biggest tail risk was in January 2017, just before President Donald Trump was inaugurated.
More than one year later, Trump is acting on his promise to tighten trade with an 'America First' approach, by imposing tariffs on steel, aluminum, solar panels, and other US imports. According to Reuters, his administration is expected to announce up to $60 billion in tariffs on Chinese imports by Friday, targeting tech, telecoms, and intellectual property.
These actions could trigger a trade war if other countries retaliate by restricting goods they import from the US like orange juice and motorcycles.
But that's not even the most worrying thing for Michael Hartnett, BAML's chief investment strategist.
"Ominously," he said in a note on Tuesday, investors are yet to act on their fears. The survey showed they remain bullish on global, bank, and tech stocks, and are betting against bonds and defensive stocks that could be helpful in a downturn.
As for what's keeping investors bullish, they still expect to profit from earnings growth and low interest rates. In contrast, BAML is forecasting higher volatility, lower corporate bond prices, and peaking stock prices, Hartnett said.
Even as the 10-year yield inches towards the seemingly make-or-break level of 3%, investors said only a 3.6% yield would be attractive enough to move them away from stocks and into bonds.