Stocks, and especially small caps, soared today (as we previewed yesterday) as tech saw another wave of outflows, amid another round of growing expectations that the Fed will be able to pull off a soft (or maybe even "no" landing), but not everyone is falling for it. As Bank of America's derivatives team writes in its latest bearish overnight note (available to pro subs), don’t go all-in on “Fed done, inflation gone, recession postponed” trade.
As the team led by BofA strategist Benjamin Bowler (which has been among the more bearish on the street) writes, "the more bearish view we’ve held in the last 18 months helps understand why equities are rallying today." As Bowler explains, the group's thesis - which received little pushback from investors - was "predicated on sticky inflation and a hawkish Fed restraining the Fed put and causing a recession and/or other major shock." However, the biggest risk to the thesis was "inflation retreating without a major growth slowdown, and the market assuming the Fed is back on its side."
Indeed, one look at the latest rotation out of tech and into small caps indicates that the market now seems to be trading on this "Fed done, inflation gone, recession postponed" scenario; Bowler explains below: