Bank of America strategists are warning that Wall Street may be more vulnerable to a volatility spike than calm markets currently suggest, as investors pull money from U.S. stocks while Treasury yields, commodity prices and policy uncertainty remain elevated.
U.S. equity funds recorded $14.2 billion of outflows over the past three weeks, the largest three-week withdrawal since January, according to BofA data based on EPFR Global. Demand for stocks is also slowing internationally: global equity funds attracted an average of about $7 billion per week during the period, down sharply from roughly $52 billion a week in July.
Yet the market itself is showing little sign of fear.
The Cboe Volatility Index, or VIX, finished Friday around 15.9, well below levels normally associated with serious market stress. The S&P 500 also rebounded 0.9% Friday and remains up nearly 12% in 2026 despite ending the week down 0.8%.
That disconnect is what concerns BofA strategists including Jared Woodard and Michael Hartnett. Long-term Treasury yields have climbed to levels last seen nearly two decades ago, commodities have surged and the Federal Reserve is approaching another potentially market-moving rate decision, yet volatility remains subdued.
The 30-year Treasury yield reached roughly 5.38% this week, its highest level since 2007, while the 10-year briefly approached 5%.
BofA described the combination of relaxed markets and increasingly forceful policy responses as a setup that could produce larger swings if investors suddenly change course.
Stocks Are Calm Despite a Much Tougher Rate Environment
The warning does not amount to a forecast that stocks are about to collapse.
The issue is that several sources of support have weakened at the same time investors remain heavily exposed to equities.
The S&P 500 reached a record about a month ago and has since traded within a relatively tight range. Volatility has risen at points, but Friday’s VIX reading shows investors are still pricing a relatively orderly near-term market.
Bond markets are sending a less comfortable signal.
August consumer prices increased 0.4%, leaving annual inflation at 3.4%. The report pushed market expectations for a Federal Reserve rate increase next week to nearly 90%, up from roughly 72% before the data.
Higher rates and Treasury yields do not automatically end an equity rally, particularly when earnings remain strong. They do raise the hurdle stocks need to clear.
A 10-year Treasury yield near 5% gives investors a much more competitive alternative to equities than the low-yield environment that supported elevated stock valuations earlier in the decade. Expensive areas of the market become more sensitive to disappointing earnings when investors can earn close to 5% in government bonds.
Oil has added another source of uncertainty. Brent crude briefly reached $109.97 a barrel Friday before retreating toward $104.50, but remained more than 8% higher for the week.
The combination of higher energy prices and persistent inflation leaves the Fed with less room to support markets if growth weakens.
AI Spending Is Another Risk BofA Is Watching
BofA also questioned whether the massive investment flowing into artificial intelligence has produced enough economy-wide productivity growth to justify current optimism.
The bank estimates roughly $1.5 trillion has been spent on AI over the past three years, while total factor productivity remains below trend. The strategists noted that the measure has historically moved closely with consumer confidence.
That does not mean AI spending is failing.
Companies including Oracle, Microsoft, Alphabet, Meta and Amazon continue reporting enormous demand for AI infrastructure, and Oracle’s latest results showed its cloud infrastructure revenue more than doubling from a year earlier.
BofA’s concern is broader: financial markets have assigned significant value to the expectation that AI investment will eventually lift productivity across the economy, while evidence of that transformation remains uneven.
If corporate earnings continue validating the spending, investors may remain willing to tolerate high capital expenditures and elevated valuations.
If returns on AI investment begin disappointing while bond yields stay high, a market that currently appears calm could become more sensitive to bad news.
The Fed Is the Next Test
Friday’s market rebound shows investors are not abandoning stocks despite BofA’s warning.
The S&P 500 gained 0.86%, the Nasdaq rose 0.96% and the Dow climbed 0.98%, with nine of the S&P 500’s 11 sectors finishing higher. The VIX simultaneously fell back below 16.
That leaves the market in an unusual position heading into the Federal Reserve’s September 16 decision.
Equity-fund flows are weakening. Long-term Treasury yields are near multiyear highs. Inflation remains above target. Oil is still above $100.
But investors are not pricing anything close to panic.
The next test is whether that calm survives another Fed rate increase and whatever guidance Chair Kevin Warsh gives about the path of rates beyond September.
If yields remain near 5% and equity outflows continue while volatility stays unusually low, BofA’s warning becomes more relevant: the risk may not be that investors are already afraid, but that too few are positioned for what happens if they suddenly become afraid.