BofA gives 4 reasons why it turned tactically bearish on stocks after a 30% rally

• Bank of America has turned tactically bearish on stocks and favors credit following a 30% rally in the S&P 500, according to an analyst note published on Tuesday.
• The cautious positioning is due to a combination of four factors, including the belief that markets are underestimating the risk of a second wave of coronavirus infections as the economy begins to slowly reopen.
• Additionally, a big disconnect between Wall Street and Main Street sets the stage for an increase in populist politics just ahead of the November 2020 election.
• Still, the bank observes one reason why the S&P 500 can hit 3,000.
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Bank of America's Research Investment Committee has turned tactically bearish on stocks and favors fixed income following a 30% rally in the S&P 500, according to an analyst note published Tuesday.

The bank listed four reasons for its cautious view of equities, and also countered with one bullish reason why stocks can rise from here.

Read more: MORGAN STANLEY: Buy these 20 stocks built to profit from a mounting inflation comeback that will alter the investing landscape

1. A second wave of coronavirus outbreaks is a real risk, and the markets are not pricing in that risk, according to the bank. Just look to South Korea, which recently saw a flare-up in new cases stemming from night clubs, despite flattening the curve. The bank noted that COVID-19 cases are still rising in the US outside of New York, just as lockdown restrictions begin to ease across the country.

2. Investors are "flying blind" given that more than 30% of S&P 500 companies have withdrawn forward-looking earnings guidance, "and the ratio of positive vs. negative sentiment on corporate earnings calls is the worst since 2012, making valuation and fundamental investing harder than ever," the bank said.

3. There's a growing disconnect between Main Street and Wall Street, evidenced by the fact that the S&P 500 index has rallied 30% while more than 36 million Americans lost their jobs. This disconnect will only fuel a rise in populist politics ahead of the November 2020 election.

4. "The greatest risk" to equities according to the analyst note is Congress acting too slow to pass additional stimulus measures, especially with the congressional budget coming into focus this spring. More stimulus is necessary because "when companies and households are saving, only public spending can end a recession." If Congress stalls in passing additional stimulus, "a big market correction to 2,650 may be necessary to focus [their] mind," the bank said.

While Bank of America is tactically bearish and favors credit until there's a market correction, it does observe one tactical buy signal that is flashing right now: sentiment.

Sentiment among investors is at an extreme bearish level, which is considered to be a contrarian buy signal by many investors.

According to Bank of America's Bull & Bear indicator, sentiment currently reads at 0.0 out of 10, representing extreme bearish investor positioning and supporting a 3,000 S&P 500 price target when combined with fiscal stimulus measures.

This Bank of America signal echoes a recent investor sentiment poll that showed investors are the most bearish they have been since April 2013.

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