Extremely bullish positioning persists, but yields and political events could mark a turning point for risk appetite

Overview

This is a global multi-asset fund flow and investment strategy report. It concludes that risk appetite remains supported by expectations of earnings growth, contained bond yields, sustained AI capital expenditure, and favorable policy assumptions. However, positioning has become extremely bullish, and long-end yields and political events could disrupt the prevailing consensus. BofA therefore emphasizes the hedging role of gold and natural resources.

Core views

Cross-asset performance year to date has diverged significantly: oil is up 44.3%, international equities 15.6%, the S&P 500 Index 12.6%, gold 5.9%, high-yield bonds 2.7%, cash 2.4%, the US dollar 0.8%, and investment-grade bonds 0.2%, while government bonds are down 1.1% and Bitcoin is down 9.3%. The report uses this to show that commodities and non-US equities are leading, while government bonds and Bitcoin are lagging. The report views bond yields as the central constraint on current asset pricing: bonds trade information, while equities trade narratives, and the equity market is trading around the idea that yields have peaked. Duration assets have already benefited, and even previously unloved, bond-sensitive UK mid-caps have risen to record highs. BofA believes that the underperformance of AI capital spenders and builders relative to AI adopters may end only after the 30-year US Treasury yield falls below 5%. This is because elevated long-end yields increase financing and valuation pressure on AI investment, whereas AI-adopting industries such as healthcare and financials face a smaller direct capital-expenditure burden. Around the Jackson Hole policy speech, the report establishes explicit interest-rate scenarios. The successful scenario is a bullish flattening of the yield curve: policy messaging maintains a credibly hawkish stance on inflation to anchor the front end while sending a moderate signal to the long end and supporting US Treasury buybacks. If credibility can be maintained at both ends, the report believes that both risk appetite and the US dollar could strengthen. The failure scenario is a yield breakout above the August 19 intervention levels of 4.7% for the 10-year US Treasury and 5.3% for the 30-year US Treasury. In that case, the US dollar could fall sharply, and defensive sectors would outperform cyclical and duration assets. Internal market signals continue to indicate that risk appetite has not disappeared. The report interprets global financial stocks as evidence that bond yields have not yet threatened the macroeconomy or earnings per share, while the broker-dealer sector indicates that speculative demand remains strong. It also notes that round-the-clock agentic trading could increase future market volumes. However, the contrarian view is that risk indices are drifting higher without clear leadership, meaning the current rally is supported more by positioning than by leading sectors. Overall weekly fund flows remained positive: bonds received US$17.7 billion, equities and cash each received US$9.2 billion, gold received US$7.3 billion, and crypto assets received US$3.2 billion. Gold and crypto assets both recorded their largest inflows since October 2025. High-yield bonds recorded a US$0.7 billion outflow, their largest since April 2026 and their first in six weeks. The US$9.2 billion net equity inflow comprised US$25.0 billion of ETF inflows and US$15.9 billion of mutual fund outflows. US equities recorded their first outflow in five weeks at US$4.4 billion, Japanese equities resumed inflows with US$2.7 billion, European equities recorded their first outflow in four weeks at US$0.2 billion, and emerging-market equities recorded their first inflow in three weeks at US$0.4 billion. The style and sector distribution of equity flows was uneven. US small-caps received US$0.4 billion, while value, growth, and large-cap stocks recorded outflows of US$2.3 billion, US$2.7 billion, and US$5.1 billion, respectively. Technology and materials received inflows of US$4.6 billion and US$4.2 billion, respectively, with the materials inflow the largest since March 2026; utilities received US$0.1 billion. Financials, healthcare, consumer sectors, real estate, energy, and communication services recorded outflows of US$1.2 billion, US$1.1 billion, US$0.6 billion, US$0.4 billion, US$0.2 billion, and US$0.2 billion, respectively, with healthcare posting its largest outflow since March 2026. Fixed-income flows favored higher-quality and selected defensive instruments. Bond funds have recorded inflows for 70 consecutive weeks, including US$17.7 billion during the week. Investment-grade bonds have received inflows for 21 consecutive weeks, including US$7.7 billion during the week. Emerging-market debt, US municipal bonds, government bonds/Treasuries, inflation-protected bonds, and bank loans received US$3.0 billion, US$2.3 billion, US$4.2 billion, US$0.2 billion, and US$0.8 billion, respectively, corresponding to 4, 19, 9, 30, and 11 consecutive weeks of inflows. By contrast, high-yield bonds recorded a US$0.7 billion outflow, indicating a marginal weakening in credit risk appetite. BofA private clients manage US$4.7 trillion in assets, of which equities account for 66.2%, bonds 17.2%, and cash 9.4%, with the cash share at an all-time low. Equity exposure continues to rise: equity ETF holdings increased 0.8% over the past four weeks and 7.0% year to date. Equity ETFs and bond ETFs account for 21% and 19% of assets under management, respectively. Meanwhile, bond inflows over the past four weeks were the largest since May, as clients bought investment-grade bond, municipal bond, and TIPS ETFs while selling utilities, healthcare, and REIT ETFs. Since 2020, private clients have cumulatively invested US$52.0 billion in intermediate-term US Treasuries and US$30.0 billion in short-term Treasury bills. Positioning indicators have entered a clearly crowded range. The BofA Bull & Bear Indicator rose from 9.5 to 9.7 because global equity-index breadth strengthened, hedge funds increased gold longs and VIX shorts, and high-yield bond outflows only partially offset these factors. Its components show fund manager survey positioning at the 100th percentile, equity flows at the 92nd percentile, hedge fund positioning at the 84th percentile, credit-market technicals at the 77th percentile, global equity-index breadth at the 77th percentile, and bond flows at the 65th percentile. The indicator is in the extremely bullish zone and maintains the sell signal triggered on May 26. Since that signal was triggered, the S&P 500 and MSCI World Index have nevertheless risen 2.8% and 3.3%, respectively. The legacy Bull & Bear Indicator reads 8.1. The BofA Global Breadth Rule shows that 82% of global equity-market indices are simultaneously above their 50-day and 200-day moving averages. A breadth sell signal is triggered when the proportion exceeds 88%; the previous signal occurred on January 28. China, India, and Brazil are currently among the few markets that have not yet reached the same overheated state. Together with the Bull & Bear Indicator, this measure shows that the market trend remains upward, but breadth and positioning are approaching historically extreme levels. The report summarizes the current summer consensus as: “no landing, no rate hikes, no cuts to AI capital expenditure, and no Democratic sweep, therefore no fear.” Investors are consequently betting on rising earnings, capped bond yields, a high-pressure policy for the real economy, and a backstop policy for Wall Street. Positioning consists of long equities, with simultaneous regional preferences for the United States and Asia/emerging markets; simultaneous sector preferences for technology and financials/industrials; long investment-grade bonds; and short government bonds and the US dollar. BofA itself emphasizes long positions in gold and natural resources, including GNR, to hedge the policy and political risks facing this consensus allocation. At the policy level, global central banks are shifting from rate cuts to rate hikes: over the past three months, there have been 12 rate cuts and 13 rate hikes, with South Korea's second consecutive hike the most prominent case during the week. BofA expects another 17 rate hikes and 4 rate cuts before year-end. The report believes that rate hikes by overseas central banks could complement US Treasury and foreign-exchange intervention, helping constrain long-end US yields. This affects not only the financing conditions for the AI capital-expenditure boom, but could also prevent consumers from increasing precautionary savings because they fear that US$40 trillion of government debt will constrain the government's future ability to provide relief. The report describes this policy mix as a new phase of quasi-quantitative easing or yield-curve control and notes that the US Treasury buyback program will end on November 4, the day after the US midterm elections. The potential asset-allocation outcome is a lower weighting for the US dollar and a higher weighting for gold. The report also notes that the US equity “Magnificent Seven” have not risen collectively since the Federal Reserve's October 2025 rate cut ended the nascent bond rally. Politics is another potential inflection point identified by the report. Trump's approval ratings on the economy and inflation have fallen to 35% and 28%, respectively, and the report believes that quickly ending the US-Iran conflict is one direct path to improving those ratings. Contrarian investors are waiting for two events that could shift markets toward risk aversion and cause earnings expectations to peak: first, Iranian concessions that bring about a final decline in oil prices; and second, the US midterm elections, especially a scenario in which Republicans lose the Senate or the Texas governorship. Such outcomes could indicate that voters place greater importance on affordability and low inflation than on tax cuts and deregulation.

Analysis framework

The report first compares year-to-date cross-asset returns and then assesses market positioning through weekly fund flows, regional and sector flows, and private-client allocations. It subsequently uses the Bull & Bear composite indicator and the global market breadth rule to identify crowding. Finally, it links bond yields, central-bank policy, US Treasury buybacks, AI capital expenditure, and political events in a scenario analysis that explains the conditions under which current risk appetite could persist or reverse.

Methodology notes

• Event-Based Game Theory and Behavioral FinanceFund Flow/Positioning Analysis

  Global fund flows and private-client allocation tracking

  The report analyzes weekly subscriptions and redemptions across equities, bonds, cash, gold, crypto assets, regions, styles, and sectors, together with private-client asset allocations, to determine which risk exposures investors are adding or reducing.

• Quantitative/Factor/Portfolio Theory

  BofA Bull & Bear Indicator

  This is a composite sentiment indicator comprising fund manager positioning, hedge fund positioning, equity and bond flows, credit-market technicals, and global equity breadth. The current reading of 9.7 corresponds to extremely bullish positioning and a sell signal.

• Quantitative/Factor/Portfolio Theory

  BofA Global Breadth Rule

  The report measures the proportion of global equity indices simultaneously above their 50-day and 200-day moving averages to assess the breadth of the upward trend. The current reading is 82%, and a sell signal is triggered above 88%.

• Fixed Income and Credit AnalysisYield curve analysis

  Bullish yield-curve flattening and long-end yield thresholds

  The report separately analyzes how policy affects front-end inflation expectations and long-end government bond yields. It identifies 4.7% for the 10-year and 5.3% for the 30-year as key breakout levels indicating policy failure, while a 30-year yield below 5% is the condition under which the relative performance of AI-related assets may change.

• Event-Based Game Theory and Behavioral FinanceEvent-driven analysis

  Policy and political event scenario analysis

  The report establishes success and failure scenarios around the Jackson Hole speech, US-Iran tensions, the US midterm elections, and the end date of the Treasury buyback program, and assesses their effects on yields, the US dollar, risk appetite, and sector styles.

• Quantitative/Factor/Portfolio Theory

  Global and sector barbell asset allocation

  The report describes current equity positioning through a dual-barbell structure comprising the United States and Asia/emerging markets, as well as technology and financials/industrials, while using gold and natural resources to hedge policy and political risks.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Global equities

  Consensus positioning remains long equities, with the United States and Asia/emerging markets forming a regional barbell.

  Strengths

  Expectations of earnings growth, stronger global equity-index breadth, and net equity inflows continue to provide support.

  Weaknesses

  The Bull & Bear Indicator is in the extremely bullish zone, while the rise in risk indices lacks clear sector leadership.

  Comparison

  International equities are up 15.6% year to date, while the S&P 500 Index is up 12.6%.

  Risks

  Long-end yields could break above key levels, or political events could cause earnings expectations to peak.

• AI capital spenders, AI builders, and AI adopters

  The report believes that elevated long-end yields cause AI capital spenders and builders to underperform AI adopters.

  Strengths

  No cuts to AI capital expenditure remain one of the market's core consensus views.

  Weaknesses

  Capital spenders and builders face more direct financing and valuation pressure.

  Comparison

  AI adopters such as healthcare and financials are outperforming AI capital spenders and semiconductor builders. The report believes this gap may end only after the 30-year US Treasury yield falls below 5%.

  Risks

  A failure to control long-end yields would threaten the financing conditions for the AI capital-expenditure boom.

• Investment-grade bonds

  Consensus positioning is long investment-grade bonds, and BofA private clients are also buying related ETFs.

  Strengths

  They have recorded net inflows for 21 consecutive weeks, including US$7.7 billion during the week.

  Weaknesses

  Overall bond returns remain constrained by rising long-end yields.

  Comparison

  Their flows were stronger than those of high-yield bonds, which recorded a US$0.7 billion outflow during the week.

  Risks

  A rapid rise in yields could create duration pressure.

• High-yield bonds

  Fund flows indicate a marginal weakening in credit risk appetite and partially offset the increase in the Bull & Bear Indicator.

  Strengths

  Their year-to-date return is 2.7%.

  Weaknesses

  They recorded a US$0.7 billion outflow during the week, their first in six weeks and their largest since April 2026.

  Comparison

  Their flows were weaker than those of investment-grade bonds, which continued to receive inflows.

  Risks

  Further outflows could weaken credit-market technicals.

• Gold and natural resources (GNR)

  BofA uses them as allocations that hedge policy and political risks.

  Strengths

  Gold received US$7.3 billion during the week, its largest inflow since October 2025, and is up 5.9% year to date.

  Comparison

  The report expects a phase of quasi-quantitative easing or yield-curve control could reduce allocations to the US dollar and increase allocations to gold.

  Risks

  The current allocation rationale depends on the continued presence of policy and political risks.

• US dollar

  Consensus positioning is short the US dollar, but the report believes that a credible bullish yield-curve flattening scenario could even drive the US dollar higher.

  Strengths

  Successful policy communication could support both risk appetite and the US dollar.

  Weaknesses

  Policy failure and a yield breakout above intervention levels could cause the US dollar to fall sharply.

  Comparison

  The US dollar is up 0.8% year to date.

  Risks

  Quasi-quantitative easing or yield-curve control could reduce allocations to the US dollar.

• Crypto assets

  They recorded significant inflows during the week, but their year-to-date price performance has lagged.

  Strengths

  They received US$3.2 billion during the week, the largest inflow since October 2025.

  Weaknesses

  Bitcoin is down 9.3% year to date.

  Comparison

  The recovery in fund flows contrasts with negative year-to-date returns.

Key data

• Year-to-date cross-asset returnsOil 44.3%; international equities 15.6%; S&P 500 Index 12.6%; gold 5.9%; high-yield bonds 2.7%; cash 2.4%; US dollar 0.8%; investment-grade bonds 0.2%; government bonds -1.1%; Bitcoin -9.3%US dollar-denominated performance year to date in 2026
• Weekly major asset-class flowsBonds +US$17.7 billion; equities +US$9.2 billion; cash +US$9.2 billion; gold +US$7.3 billion; crypto assets +US$3.2 billionGold and crypto assets both recorded their largest weekly inflows since October 2025
• Equity vehicle flowsNet equity inflow US$9.2 billion; ETF inflow US$25.0 billion; mutual fund outflow US$15.9 billionETF inflows offset mutual fund redemptions
• Regional equity flowsUnited States -US$4.4 billion; Japan +US$2.7 billion; Europe -US$0.2 billion; emerging markets +US$0.4 billionThe United States recorded its first outflow in five weeks, Japan resumed inflows, Europe recorded its first outflow in four weeks, and emerging markets recorded their first inflow in three weeks
• US equity style flowsSmall-caps +US$0.4 billion; value stocks -US$2.3 billion; growth stocks -US$2.7 billion; large-cap stocks -US$5.1 billionOnly the small-cap style received inflows
• Sector flowsTechnology +US$4.6 billion; materials +US$4.2 billion; utilities +US$0.1 billion; financials -US$1.2 billion; healthcare -US$1.1 billion; consumer sectors -US$0.6 billion; real estate -US$0.4 billion; energy -US$0.2 billion; communication services -US$0.2 billionMaterials recorded their largest inflow since March 2026, while healthcare recorded its largest outflow since March 2026
• Major bond flowsInvestment-grade bonds +US$7.7 billion; high-yield bonds -US$0.7 billion; emerging-market debt +US$3.0 billion; municipal bonds +US$2.3 billion; government bonds/Treasuries +US$4.2 billion; TIPS +US$0.2 billion; bank loans +US$0.8 billionHigh-yield bonds recorded their first outflow in six weeks and their largest outflow since April 2026
• Consecutive bond inflow periodsBonds 70 weeks; investment-grade bonds 21 weeks; emerging-market debt 4 weeks; municipal bonds 19 weeks; government bonds/Treasuries 9 weeks; TIPS 30 weeks; bank loans 11 weeksConsecutive weeks of net inflows for each category through the current period
• Private-client assets and allocationsUS$4.7 trillion; equities 66.2%; bonds 17.2%; cash 9.4%Cash allocation is at an all-time low, while equity exposure continues to rise
• Private-client ETF allocationsEquity ETFs account for 21% of AUM; bond ETFs account for 19% of AUM; equity ETF holdings +0.8% over the past four weeks and +7.0% year to dateBond inflows over the past four weeks were the largest since May
• Cumulative private-client US Treasury inflowsIntermediate-term Treasuries US$52.0 billion; short-term Treasury bills US$30.0 billionCumulative since 2020
• BofA Bull & Bear Indicator9.7, previous reading 9.5; legacy indicator 8.1In the extremely bullish zone, with the sell signal triggered on May 26 still valid
• Market performance since the sell signalS&P 500 Index +2.8%; MSCI World Index +3.3%Since the Bull & Bear sell signal was triggered on May 26
• Bull & Bear component percentilesFund manager survey positioning 100%; equity flows 92%; hedge fund positioning 84%; credit-market technicals 77%; global equity-index breadth 77%; bond flows 65%Most components are bullish, while bond flows are neutral
• Global market breadth82%; sell threshold >88%The proportion of global equity indices simultaneously above their 50-day and 200-day moving averages; the previous sell signal occurred on January 28
• Changes in global central-bank policy12 rate cuts and 13 rate hikes over the past three months; 17 rate hikes and 4 rate cuts forecast before year-endBofA believes global central-bank policy is shifting from rate cuts to rate hikes
• Key US Treasury yield levels10-year 4.7%; 30-year 5.3%; the condition for a change in AI relative performance is a 30-year yield below 5%The first two are the August 19 intervention levels and policy-failure breakout levels cited in the report
• US Treasury and political timelineTreasury buyback program ends on November 4The report states that this date is the day after the US midterm elections
• US president's approval ratings on the economy and inflationEconomy 35%; inflation 28%The report states that both approval ratings declined again
• Size of US government debtUS$40 trillionThe report uses this to explain concerns that consumers may increase precautionary savings

Impact & implications

The report believes that the current rise in risk assets remains supported by capital flows, earnings expectations, and policy assumptions, but the market is highly dependent on the beliefs that long-end yields will remain contained, AI capital expenditure will not be cut, and political outcomes will be favorable. If yields remain constrained, risk appetite and the US dollar could stay strong. If key yields break higher or political events alter policy expectations, defensive assets could outperform cyclical and duration assets. Gold and natural resources serve as hedges against policy, fiscal, and political risks in the report.

Risks

• If the 10-year and 30-year US Treasury yields break above the August 19 intervention levels of 4.7% and 5.3%, the report expects that the US dollar could fall sharply and defensive sectors could outperform cyclical and duration assets.
• The Bull & Bear Indicator has risen to 9.7 and remains on a sell signal, indicating that extremely bullish positioning is increasing the risk of a market reversal.
• Persistently elevated long-end yields could weaken the financing conditions for AI capital expenditure and prompt consumers to increase precautionary savings because of concerns about the government's capacity to provide fiscal relief.
• High-yield bonds recorded their largest outflow since April 2026, indicating a marginal weakening in credit risk appetite.
• Changes in US-Iran tensions and the US midterm elections could shift risk appetite and cause earnings expectations to peak.
• The current rally lacks clear market leadership and relies more heavily on the continuation of existing positioning and consensus views.

What to watch

• Watch whether the Jackson Hole policy speech can lower long-end yields while anchoring front-end inflation expectations.
• Monitor breakout risks at 4.7% for the 10-year US Treasury and 5.3% for the 30-year US Treasury, as well as whether the 30-year yield can fall below 5%.
• Track whether the Bull & Bear Indicator remains in the extremely bullish zone and whether the global breadth indicator rises from 82% above the 88% sell threshold.
• Watch whether the central-bank forecast of 17 rate hikes and 4 rate cuts before year-end materializes, as well as the impact of the US Treasury buyback program ending on November 4.
• Watch whether the US-Iran conflict ends quickly and whether oil prices experience a final decline.
• Monitor the US midterm elections, especially whether Republicans lose the Senate or the Texas governorship.
• Track whether high-yield bond outflows, US equity redemptions, and inflows into technology and materials persist.