When Bank of America’s chief equity strategist tells you to watch for “banks breaking bad,” you pay attention.
Michael Hartnett — one of Wall Street’s most respected and closely followed voices — just sounded an alarm that should have every investor checking their exposure. In his latest weekly flow note, Hartnett warned that problem loans in the financial sector are flashing danger signals that could trigger a “proper flush in risk assets” as early as next month.
The specific concern? Bank-loan ETFs. These funds, which hold portfolios of leveraged loans made to below-investment-grade borrowers, have become popular with yield-hungry investors over the past few years. Hartnett is telling those investors the ground beneath them may not be as solid as they think.
This isn’t coming out of nowhere. Back in October, JPMorgan CEO Jamie Dimon dropped his now-infamous “cockroaches” warning — when you see one problem loan, there are probably more hiding in the walls. That panic never fully dissipated. It just went quiet for a few months. Now Hartnett is pulling it back into the spotlight with fresh data suggesting the cockroaches have been multiplying.
The timing matters. The economy looks fine on the surface — unemployment is low, corporate earnings are beating estimates, and the S&P 500 is within spitting distance of all-time highs. But Hartnett has built his reputation on seeing problems “under the hood” before they become obvious. He’s the same strategist who recently noted that U.S. stocks are attracting their smallest share of global equity flows since 2020. Money is quietly leaving.
The bank-loan ETF space is especially vulnerable because it sits at the intersection of several risks. These are loans to companies that were already highly leveraged when they borrowed. Many of those loans carry floating rates, meaning borrowers’s interest costs have stayed elevated even as the Fed has paused cuts. If a recession hits — or even a meaningful slowdown — the weakest borrowers will start defaulting. And the investors holding those loan ETFs will be left holding the bag.
For context, this warning pairs uncomfortably well with the broader credit picture. Private credit markets are already showing cracks, with Marathon Asset Management flagging 15% default rates on software loans and Blue Owl recently halting fund withdrawals. The leveraged lending ecosystem that boomed during the zero-rate era hasn’t been stress-tested in a real downturn. Hartnett’s warning suggests that test may be closer than most people think.
The actionable takeaway isn’t to panic — it’s to audit your exposure. If you’re sitting in bank-loan ETFs, high-yield funds, or private credit vehicles, now is the time to ask hard questions about what’s actually inside those portfolios. The cockroaches don’t announce themselves. You have to go looking.