July's stock rebound found 'oxygen' from falling Treasury yields - but the bear-market rally looks close to an end, says BofA

• US stocks experienced a bear-market rally in July but the recent upswing is likely to fade, Bank of America said Friday.
• The stock market rally found 'oxygen' from the fall in the 10-year Treasury yield prompted by 'recession shock.'

US stocks have made strong gains this month, but the bear-market rally looks unsustainable as the Federal Reserve has yet to back off its aggressive rate-hike campaign, according to Bank of America.

The S&P 500 on Friday was on course to close out July with a gain of about 8%, and the Nasdaq Composite was set to lock in a 10% rise over the month – the best performance for each index since November 2020. Bank of America said in its Flow Show note published Friday that this week marked the largest inflow into US stocks in six weeks, at $9.5 billion.

"Oxygen for [the] bear market rally" has come from this month's slide in the 10-year Treasury yield prompted by "recession shock," said Bank of America strategists led by Michael Hartnett.

The 10-year yield has dropped to 2.6% from above 3% over the past month. Yields fall as bond prices rise, and investors have been driving into government debt for relative safety in the face of deteriorating economic conditions.

The world's largest economy is poised for a technical recession. US gross domestic product shrank by 0.9% in the second quarter, the Commerce Department said Thursday in a preliminary reading. Activity contracted by 1.6% in the first quarter.

Stocks rallied on Wednesday after Fed Chairman Jerome Powell said policy makers would be data-dependent in deciding what's next for its rate-hiking cycle. Investors appeared to interpret Powell's comments as a signal the central bank would pause rate hikes if the economy significantly deteriorates through its next meeting in September.

But it's "too early to reposition for a 'Fed pivot' bull trade," with such a trade still out by about six to nine months, said BofA on Friday.

On the idea of the Fed communicating a turnaround from hiking interest rates, "we'll get there" but there are still "not enough pivot catalysts" in place, in part with US payrolls still standing above 100,00 each month, initial weekly unemployment claims running below 300,000, and inflation prints still running hot, the bank said.

The Fed this week raised the fed funds rate by 75 basis points, the second straight rate hike of that size and the fourth increase this year. The US benchmark interest rate now stands at 2.25% to 2.5%.

"[Since] catalyst for bear market was repricing of interest rates (took SPX from 4800 to 3800), yields now falling and equities rallying makes sense," said BofA. "We remain of view this is a bear rally," with the bank saying it would sell the S&P 500 above 4,200, and "true lows" appear to be below 3,600.

The S&P 500 moved around 4,100 on Friday. It remains down by 13% this year and the Nasdaq Composite was off by 21% so far in 2022.