Bank of America expects recession shock from worst drop in 52 years

A “recession shock” is beginning for markets after the S&P 500 posted its worst half-year in more than 50 years, Bank of America Corp. chief investment strategist Michael Hartnett said.

While expectations of aggressive rate hikes by the Fed are peaking, inflation expectations are not, with BofA’s bull-bear indicator remaining at “high bear” for the third week in a row, Hartnett wrote in a note.

Both stocks and bonds were hit by capital outflows this week as investors fear the global economy could contract amid runaway inflation and tightening central banks. About $5.8 billion flowed out of global equity funds in the week to June 29, although US stocks saw small inflows of around $500 million, BofA said, citing data from EPFR Global. The bonds had writedowns of $17 billion, the data shows.

Markets have been hit this year as investors sold off risky assets fearing a looming recession, while inflation remains stagnant even as central banks launch aggressive rate hikes. Taken together, stocks and bonds around the world posted the biggest drop in history, according to Bloomberg data going back to 1990. The S&P 500 index alone lost more than $8 trillion, marking its worst first half in more than half a century.

Other seemingly bullish strategists expect stocks to at least partially recover in the second half, according to Bloomberg surveys. But Michael Wilson’s pairs at Morgan Stanley warned of more declines until the market bottoms. Strategists at Goldman Sachs Group Inc. said on Friday that the risk of a further sell-off in equity markets remains high as investors are only pricing in a mild recession.

The upcoming earnings season will also be crucial for investors to assess the impact of higher prices and weaker consumer confidence on corporate profits.