Bank of America: In the week when Trump threatened to raise tariffs, $17 billion flowed out of U.S. stocks.

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The US stock market has recently experienced significant capital outflows, showing the direct impact of geopolitical risks on investor sentiment. Against the backdrop of President Trump threatening to impose tariffs on certain European countries over the Greenland issue, risk aversion in the market increased, leading to capital being withdrawn from US assets.

According to EPFR Global data cited by Bank of America, in the week ending January 21, US equity funds saw a net outflow of nearly $17 billion. This data covers the reaction period following Trump’s tariff threats, highlighting the immediate impact of policy uncertainty on capital flows.

Meanwhile, there was a clear divergence in capital flows, with European and Japanese markets becoming safe havens for funds. European equity funds saw the strongest six-week inflow since June, while Japanese funds recorded the largest weekly increase since October. This cross-market rotation of capital reflects investors reallocating assets globally in order to hedge against risks brought by US policy fluctuations.

Although the market subsequently stabilized and rebounded after the tariff threat was lifted, the large-scale capital flight sounded the alarm for the market. With the Federal Reserve set to meet next week, the unpredictable US policy-making process continues to put pressure on the dollar, and market participants are closely watching the potential disruptions that policy direction could cause to economic fundamentals.

Rapid Shifts and Recovery in Market Sentiment

Bank of America's report noted that this wave of outflows mainly occurred during the period when Trump took a tough stance against European countries over Greenland. Although the tension was later eased, EPFR Global’s data captured the peak of investor anxiety at the time.

During these turbulent days, Trump at one point threatened to impose tariffs, then softened his tone. According to Bloomberg, the turnaround happened later that week, when NATO Secretary General Mark Rutte facilitated a breakthrough at the Davos World Economic Forum, prompting Trump to drop the tariff threat.

Buoyed by this news, as well as data showing the US economic fundamentals remained solid, the US stock market subsequently regained most of the week’s lost ground. Investors experienced volatility triggered by policy flip-flops, rapidly shifting from panic selling to reassessment.

However, despite the stock market rebound, the foreign exchange market remained affected by the ongoing unpredictability of US policy. On the eve of the key Federal Reserve meeting, this uncertainty became a major drag on the dollar’s performance.

Overall Sentiment Remains Extremely Bullish

Despite large-scale redemptions faced by some funds, overall market sentiment has not seen a fundamental reversal. In their report, Bank of America strategists led by Michael Hartnett wrote that the bank’s “Bull & Bear Indicator” shows that current overall sentiment in the stock market remains “extremely” bullish.

Hartnett pointed out that while the indicator has retreated slightly due to the large outflows, this suggests that the long-term bullish logic has not been completely undermined by short-term policy disruptions, and investors are still seeking structural opportunities amid volatility.

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