Bank of America sounds the "1994-style" alarm: the Federal Reserve's rapid interest rate hikes hang the "Sword of Damocles" over the US stock market, fearing a structural severe decline.

As the year 2026 progresses, global investors are striving to understand the final direction of inflation, interest rates, and the U.S. stock market for the remaining time of the year. At this crucial juncture, the global research team at Bank of America has released a new, heavyweight macro strategy report. Bank of America has sounded the alarm bell in the report: the current macroeconomic trajectory is remarkably similar to that of 1994. Michael Hartnett, Chief Investment Strategist at Bank of America, explicitly points out in the latest edition of the "Fund Flows Report" that the current economic situation in the United States has "significant similarities" with 1994: stronger-than-expected economic data compelled the Federal Reserve to swiftly pivot from a loose stance to aggressive rate hikes, the U.S. stock market underperformed throughout the year, and U.S. Treasury yields surged until the end of the year when the Mexican peso crisis and the Orange County bankruptcy event brought some relief to the bond market. Hartnett describes the current state of the market as a "frozen bullishness" investors are indifferent to the nearly 5% yield on the long end. However, the key conditions that historically end bull markets are gradually taking shape. He specifically warns that if the already retraced seven giant U.S. stock ETFs cannot hold the $65 level, it would constitute a dangerous signal. The "4-4 combination": a rare signal not to be overlooked Bank of America's research report cites a historical statistical pattern: in the past century, the S&P 500 index has dropped an average of 4% in the three months following a CPI breakout above 4%, and 7% on average in the six months. This means that inflation itself is transitioning from an economic data indicator to a measure of investment risk. Currently, the year-on-year increase in U.S. CPI has climbed to 4.2% in May accelerating for three consecutive months. Energy prices are the primary driver of this rise: energy prices rose by 3.9% month-on-month in May, accounting for over 60% of the overall monthly CPI increase, with the national average gasoline price increasing by 8.8% year-on-year, surging over 50% since the end of February due to U.S. action against Iran. However, what truly concerns Bank of America's strategy team is not the inflation readings themselves, but the rare relationship between it and the unemployment rate. The current unemployment rate stands at 4.3%, indicating that CPI (4.2%) and the unemployment rate (4.3%) are almost at the same level historical experience shows that this combination often occurs on the eve of a Federal Reserve tightening cycle. Bank of America's report traces the significance of this data back to key moments in Federal Reserve history: 1966, 1973, 1990, 2000, 2008, and 2021. In each of these years, the Federal Reserve was either in or entering a sustained tightening cycle, followed by significant volatility in the market and severe challenges faced by risk assets. If the average monthly month-on-month increase of 0.5% over the past six months continues, the annualized CPI reading will surpass 5% by the midterm elections in the United States. At the same time, core inflation is expected to approach the range of 3.0% to 3.5%. A repeat of 1994: speed is more important than magnitude Bank of America's research team points out that in order to understand the market risks in the second half of 2026, one must turn the clock back to 1994. The key lesson from 1994 is not the final magnitude of the Federal Reserve rate hike, but the speed and unexpectedness of its hikes. In Bank of America's analytical framework, the story of 1994 unfolded in such a way: the Federal Reserve continued its loose policy against a backdrop of "no employment recovery," but abruptl