Bank of America warns: It's time to bet against US stocks now!

As the US stock market retreats from historical highs, a top strategist at Bank of America warns investors to remain cautious and lists a series of economic indicators from history that signal the end of a stock market rebound.

Sebastian Raedler, head of European stock strategy at Bank of America, presented reasons for a bearish outlook on the US stock market. He predicts that the S&P 500 Index (SPX) may further decline by 2.6% to 5400 points, and European stock markets may fall by about 15%. So far this year, the S&P 500 Index has set more than 30 historical highs, closing at 5667 points last week before retreating.

Raedler said on CNBC's "Squawk Box Europe" program last week, "If you ask me when to be bearish, I would say it is when the market is at historical highs, risk premiums are at historical lows, corporate earnings and profit margins are as high as they can get, and the US macroeconomic recovery is in its final stage."

Raedler also stated that the recent rise in unemployment from very low levels is a "ominous" signal.

He explained, "Historically, whenever the unemployment rate starts to rise, it does not easily fall back. This is usually the end of the business cycle." The US unemployment rate unexpectedly rose to 4.1% in June, the highest level since October 2021. Previously, economists had forecasted the unemployment rate to remain stable at 4%.

In fact, since April 2023, the unemployment rate has steadily risen by 70 basis points. The strategist added that this situation usually leads to an increase in risk premiums and a decline in asset prices, especially when the market has already risen to high levels." He advised, "Caution is needed in this regard."

Risk premium is the return that investors demand for holding high-risk assets such as stocks above the risk-free rate (usually the 10-year US Treasury bond rate). When risk premiums rise, the stock market usually falls.

Raedler also emphasized the increase in initial jobless claims (up 15% year-to-date) and the decline in hiring intentions of small and medium-sized companies. He believes that these factors indicate that "more evidence of a weak labor market is about to come".

In the short term, the unemployment rate often moves inversely with stock market returns.

The Bank of America strategist also expressed concerns about consumer confidence, stating that consumer confidence is "collapsing". He pointed out that consumer confidence is usually a leading indicator of consumption, and the current level is "consistent with negative consumption growth". The University of Michigan's consumer sentiment survey released earlier this month showed that consumer sentiment in July was down 7.7% from the same period last year and down 3.2% from the previous month.

Hani Redha, portfolio manager at Pine Bridge Investments, holds a more optimistic view.

Redha quoted legendary value investor Peter Lynch's advice not to prematurely think that the stock market rebound has ended: "Investors lose far more money anticipating market corrections or preparing for them than they do in the actual corrections ”