Beware of banks breaking bad, warns top B. of A. strategist. He casts a wary eye on bank-loan ETFs.

By Jules Rimmer Problem loans in the financial-services sector imply mounting risks for markets Bank of America strategist Michael Hartnett is worried about problems "under the hood" of the U.S. economy. A previous version of this report provided an inaccurate name for the exchange-traded fund "SRLN." It is the State Street Blackstone Senior Loan ETF. The story has been corrected. An alarm bell has been rung by one of Wall Street's most prominent strategists. Investors ought to be wary of developments in the financial sector, with problem loans increasingly a concern that could trigger a "proper flush in risk assets" next month. This stark warning emanates from one of Wall Street's most respected commentators, Bank of America chief equity strategist Michael Hartnett. His weekly flow note alerts investors to watch closely the performance of exchange-traded funds that specialize in bank loans. The panic generated by Jamie Dimon's "cockroaches" forewarning last October has never fully dissipated. When bank-loan funds break below the 200-day moving average? "Bad events." Hartnett highlights two funds in particular that warrant special attention: the State Street Blackstone Senior Loan ETF SRLN and the State Street Financial Select Sector ETF XLF. So far this year, the former is down just a few percentage points, with the latter dropping about 5%, but Hartnett and team suggest that if respective key support levels for the funds' 200-day moving average at $40 and $52 are broken, that signals "bad events" are looming. He cites comparisons with pandemic-era markets and the U.K. pension-fund crisis. If the worst comes to pass, Hartnett predicts a big increase in risk aversion in March, a spike in the dollar DXY, with its index hitting 100, and a surge in demand for U.S Treasurys. Hartnett's "Flow Show" points out that, already this year, the zero-coupon Treasury-bond ETF ZROZ, which supercharges returns when rates decline, has gained more than 5%. MarketWatch Live: The 10-year Treasury yield is below 4% for the first time since November To arrest such a panic, Hartnett speculates that either the Fed would be obliged to ease or the hyperscalers (AMZN) (GOOG) (MSFT) would have to cut back on capital expenditures. Other troubling indicators are flashing in Asia, Hartnett points out, most notably in Korea, where the KOSPI KR:180721 index has already added more than 50% in 2026. Hartnett compares the bubble here to overbought levels hit by gold (GC00) in January, bitcoin (BTCUSD) in March 2024 and the "Magnificent Seven" MAGS in summer 2023. Hartnett adds that the Nikkei (NIY00) has reached an all-time high, China's currency (USDCNY) is the strongest it's been in three years, and, taken together, this combination suggests Asian assets are front running a global economic boom. Don't miss: Yes, consumers in China are consuming again. It's just not their No. 1 priority these days. KOSPI today as compared with other "bubble" peaks. In the short term, Hartnett makes the bold call to "sell the greed" in Asia, predicting a correction ahead of trade summits between Donald Trump, the U.S. president, and Japan's prime minister, Sanae Takaichi, on March 19, and China's president, Xi Jinping, on March 31. On a longer-term horizon, however, Hartnett is very constructive on the rest of the world, particularly relative to the U.S. At present, U.S. equities SPX RUT constitute 62% of the world's aggregate stock-market capitalization and the rest of the world VXUS makes up just 38%. For Hartnett, clearly, this has to start reversing, especially with the global trends of fiscal excess, populism and the end of deflation. His final point emphasizing this sea change in the investment landscape is that AI disruption is liable to be more disruptive and detrimental to the U.S. services-heavy indices, compared with the more manufacturing- and resource-heavy alternatives in Europe, Australasia, the Far East and emerging markets EEM. -Jules Rimmer This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal. (END) Dow Jones Newswires 02-27-26 1215ET