BofA Warns Wall Street Is Too ‘Blasé.’ $14 Billion Stock Exodus is ’Recipe for Volatility.’

Bank of America strategists are warning that Wall Street may be entering a more volatile period as investors pull billions of dollars from U.S. stocks while financial markets and policymakers appear relatively calm about rising Treasury yields and surging commodity prices.

U.S. equity funds recorded $14.2 billion in outflows over the past three weeks, the largest withdrawal since January, according to Bank of America, which cited data from EPFR Global. The retreat comes as appetite for stocks is also cooling globally, Bloomberg detailed.

Worldwide equity funds have attracted an average of about $7 billion per week during the same three-week period, a dramatic slowdown from the roughly $52 billion weekly average recorded in July.

The numbers suggest investors are becoming more cautious after a powerful run in equities. But Bank of America strategists, including Jared Woodard and Michael Hartnett, said that neither markets nor policymakers appear to be reacting with the level of urgency historically associated with significant financial stress.

"Markets stop panicking when policymakers start panicking, but no panic anywhere despite the highest 30-year yield since June 2007 and spiking commodities," the strategists wrote. They described the combination of "blasé markets" and "bravado policy" as a "recipe for volatility."

Oil has climbed above $100 per barrel this week, while diesel prices have reached record levels, increasing concerns that energy costs could keep inflation elevated and squeeze consumers and businesses.

At the same time, Treasury yields have moved sharply higher, and rising government bond yields can create pressure across financial markets because they increase borrowing costs for households and companies while also making fixed-income assets more attractive relative to stocks.

The Federal Reserve remains focused on incoming economic data as officials debate whether another interest-rate increase will be necessary. Chances of a rate hike in Wednesday's meeting topped 90% on Friday after core inflation was higher than expected last month.

The S&P 500 reached a record high roughly a month ago and has since remained within a relatively narrow trading range. However, several potential catalysts could disrupt that calm. Uncertainty surrounding U.S. monetary policy and the approaching midterm elections is encouraging some investors to move to the sidelines.

The unresolved war in Iran adds another geopolitical risk, particularly because of its implications for global energy markets. Investors are also questioning whether the enormous sums being spent on artificial intelligence will generate returns quickly enough to justify elevated expectations surrounding the technology.

Bank of America highlighted AI spending as another potential vulnerability. The strategists estimated that roughly $1.5 trillion has been spent on artificial intelligence over the past three years, yet they said there is still limited evidence that the investment has translated into broad productivity improvements across the economy.

Instead, total factor productivity, a measure of how efficiently labor and capital are used to generate economic output, is running below trend, according to the BofA team. The strategists noted that total factor productivity has been highly correlated with U.S. consumer confidence over the past five decades. "Sometimes Main Street knows what Wall Street doesn't," the strategists said.