(Bloomberg) -- A cocktail of real GDP forecasts, wage inflation and 10-year Treasury yields above 3 percent, “inspired” by the S&P 500 Index above 3,000 will mark a “big top” in equity and credit prices, according to Bank of America Merrill Lynch.
Bullish investor positioning, peaking corporate profits and monetary policy tightening should result in the bevy of “threes,” strategists at the bank including Michael Hartnett wrote in a note to clients Tuesday.
However, as Federal Reserve policy normalization continues and investors realize earnings have peaked, muted and more volatile returns seem likely this year, they said.
“As the Fed accelerates and leads the end of the global QE era, the bullish consensus is likely to capitulate to a more defensive posture through 2018,” they wrote. “Our favorite 2018 long remains volatility, and our favorite short is credit.”
Investors should keep a particularly close eye on average hourly earnings and semiconductor shares in coming weeks, the strategists said. Further wage growth acceleration is negative for bonds and equities and if tech stocks can't make new highs in the next week or two then market highs could be seen as having been reached for the next couple of months, they said.
However, for the current rally to continue, the credit market is key, according to Merrill Lynch.
“Corporate bond spreads remain the ‘glue' that holds the bull market together,” they wrote. “Fresh weakness would be negative for all risk assets.”
To contact the reporter on this story: Cormac Mullen in Tokyo at cmullen9@bloomberg.net.
To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Andreea Papuc, Divya Balji
©2018 Bloomberg L.P.
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