"Everyone is fully invested long!" Bank of America: Keep a close eye on the Japanese market, as it will be the 'canary in the coal mine' warning of a global crash.

The market has almost formed an “unilateral” bullish consensus, which happens to be the most worrying risk signal for Bank of America.

Bank of America’s latest issue of “The Flow Show” fund flow report shows that for the week ending July 8, global equity funds again attracted $56.6 billion in inflows, and the rate of inflows into technology stocks is expected to set a new record for the year; meanwhile, BofA’s Bull & Bear Indicator remains in the extremely optimistic range at 9.5, with the "sell signal" having been triggered for several consecutive weeks.

BofA Chief Investment Strategist Michael Hartnett believes the market is currently betting on "four things that won’t happen"—the US economy won’t have a hard landing, the Fed won’t raise rates, AI capital expenditure won’t be cut, and the Democrats won’t sweep the midterms. These four consensus views have supported the continued rise in risk assets, but if any one falls short, it could trigger a shift from boom to bust in the markets.

Among all risk observation indicators, Hartnett specifically mentions the Japanese market. He believes that Japanese bank stocks are still the "canary" of global risk appetite: If Japanese government bond yields rise rapidly further and bank stocks turn from strong to weak, it likely indicates that global risk assets are entering a correction cycle.

Bull & Bear Indicator Keeps Flashing Red: "Everyone is Fully Long"

BofA’s Bull & Bear Indicator continues at 9.5 this week, well above the 8 threshold that signals a "sell." Historical data shows that over the past 24 years, this indicator has issued a sell signal 17 times; after each, the global ACWI index dropped an average of 2%-3% over the next 2-3 months, with about 60% accuracy, and in extreme cases, a maximum drawdown of 15%-20%.

Looking at component indicators, market sentiment is almost universally extremely optimistic: hedge fund positioning is at the 81st percentile; global equity fund flows at the 88th percentile; bond fund flows at the 84th percentile; and fund manager positioning is at the 100th percentile. The only indicator still neutral is global stock market breadth.

At the same time, BofA's global fund flow trading model has also maintained a sell signal for 8 consecutive weeks.

Funds Continue Flooding into Stocks Globally, Tech Stocks May Set Records

Funds continue to chase risk assets. For the week ending July 8, global equity fund net inflow was $56.6 billion, the fourth largest weekly inflow this year; among them, technology funds attracted $18.8 billion in one week. If the momentum continues, tech fund net inflows for all of 2026 will reach $183 billion, a record high.

Regional fund flows also reflect rising risk appetite: US equity funds received $25.1 billion in net inflows; China equity funds saw $9 billion, the highest since last December; Europe equity funds had outflows for the 13th straight week. Meanwhile, investment-grade bonds had net inflows for the 14th consecutive week, and bank loan funds had their biggest weekly inflow since February last year.

Notably, cash has not left the market. The scale of money market funds has reached $7.9 trillion, a new all-time high, with a weekly inflow of $39.5 billion, meaning that while a large amount of capital chases risk assets, plenty of "dry powder" remains on standby for new allocation opportunities.

Japanese Bank Stocks Become the Most Important Global Market Warning Signal

Compared with US tech stocks, BofA focuses more on the Japanese market. Hartnett points out that over the past three years, the yield on Japan’s 10-year government bonds rose from about 0.5% to nearly 3%, while Japanese bank stocks tripled during the same period, becoming one of the strongest performing sectors globally.

He believes Japanese bank stocks actually reflect the global liquidity and yield environment. If Japan’s government bond yields keep climbing rapidly and start to drag down bank stocks, this could signal a reversal in global risk appetite and serve as the earliest "canary" indication of a correction in global stocks.

The Market Rally Is Supported by “Four Things That Won’t Happen”

Hartnett sums up the current market optimism as “four things that won’t happen.”

First, the US economy will not have a hard landing, meaning corporate profits will remain supported and funds will continue to "avoid bonds and embrace stocks."

Second, the Fed will not raise rates again at least before the midterm elections, and global central banks overall remain dovish. Since the start of the year, global central banks have cut rates 34 times, outnumbering the 21 hikes.

Third, AI capital expenditure will not be reduced. The market consensus is that global tech giants will spend about $800 billion on AI capex in 2026, rising to about $1 trillion in 2027, which is still the most important support for tech stock valuations.

Fourth, Democrats will not sweep the US midterm elections, so there will be no drastic changes in fiscal and tax policy.

Once the Four Consensus Break, Reverse Trading Opportunities Will Emerge

Hartnett also emphasizes that what truly matters is not what the market currently believes, but which consensus is most likely to be broken.

If the US economy ultimately cools distinctly and nonfarm payrolls keep weakening, long-term government bonds, defensive consumer stocks, high-dividend stocks, and large tech stocks may once again outperform the market.

If the Fed is forced to raise rates again, the US dollar and yield curve flattening trades will become the primary beneficiaries. Hartnett points out that currently both US CPI and unemployment are about 4.2%, and this combination has only appeared a few times in the past century, almost always followed by rate hikes and market turbulence.

If AI capital expenditure starts to shrink, it will directly impact the market's core investment logic. Software and large tech platforms may then outperform, while the Philadelphia Semiconductor Index (SOX) faces greater valuation pressure. BofA believes narrowing debt financing, deteriorating cash flows, and ongoing layoffs by tech giants could be signs of cooling AI investment.

Political risks also cannot be ignored. If Democrats ultimately sweep the midterm elections and Republicans lose control of the Senate, the market may price in scenarios like restricted fiscal expansion, a weaker dollar, and falling US bond yields.

Risk Warning and DisclaimerThe market has risks and investments must be cautious. This article does not constitute personal investment advice and has not taken into account any individual user's specific investment goals, financial situation, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their situation. Investing based on this information is at your own risk.