BofA Sees Risk of ‘Proper Capitulation’ If Earnings Disappoint

(Bloomberg) — US stocks could be in for more declines as the risk of a hard recession and a stronger dollar rises in the second half of the year, according to Bank of America Corp. strategists.

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Although both stocks and credit are close to pricing a mild economic downturn, equity markets could see “proper capitulation” if the second-quarter earnings season is worse than expected, strategists led by Michael Hartnett wrote in a note.

US stocks have been roiled again in July, with the S&P 500 Index on Thursday falling for the fifth day in a row, its longest losing streak in a month, as stickier-than-expected inflation spurred bets of another outsized rate hike by the Federal Reserve.

Recession worries also abound, while early indications from the earnings season suggest companies are feeling the pressure from the grim macroeconomic outlook. BofA strategist Savita Subramanian on Thursday slashed her year-end target for the S&P 500 by 20% to 3,600 points on expectations of a mild US recession in the second half of the year.

Hartnett sees the benchmark gauge declining even further. “We say at SPX 3,600 nibble, at 3,300 bite, at 3,000 gorge,” the strategist said.

In the week through July 13, global equity funds had outflows of $2.9 billion, with US stocks seeing their first redemptions in three weeks at $1.6 billion, according to the BofA strategists’ note, citing EPFR Global data. Global bonds attracted $1.6 billion, while $15.1 billion flowed into cash, the data show.

By trading style among equities, US large caps saw inflows, while small cap, growth and value all had outflows in the week. Health care and utilities led inflows among sectors, while materials had the biggest outflows.