US stocks could drop another 4% as the economic turmoil in China spooks global investors and bond yields surge, according to Bank of America Corp.’s Michael Hartnett.

The strategist — who has held on to his bearish outlook this year even as equities rallied — said a further spike in Treasury yields and a weakening Chinese yuan could push the S&P 500 to 4,200 points — nearly 4% lower than current levels.

Still, a “correction” may be postponed if “critical” bond and currency levels are defended at the Kansas City Federal Reserve’s Jackson Hole Economic Policy Symposium next week, Hartnett wrote in a note.

Global markets have been roiled this week on growing concerns about the health of China’s property market and its impact on the broader economy. The US Treasury yield surged to its highest since before the global financial crisis, while China has escalated support for the embattled yuan, only to see it sinking toward multi-year lows.

China Gloom Fuels One of Worst Weeks of Year in Global Credit

US stock futures fell on Friday, setting up the underlying indexes for their third straight weekly decline.

The Cboe equity put-to-call ratio surged above 1 on Wednesday to its highest level since the banking turmoil in March — a sign that investors are piling on protection as they expect greater volatility in single stocks. That’s “a bad sign if stocks can’t hold” at current levels, Hartnett said.

The strategist had said last month that he would recommend shorting US stocks in late-August or early-September following the strong rally earlier this year. Hartnett reiterated on Friday that a pullback would be “healthy.” Other strategists such as JPMorgan Chase & Co.’s Marko Kolanovic have also recently warned of the market risks from higher-for-longer inflation.

In another sign of investor nervousness, cash funds have seen inflows of $925 billion this year, surpassing the previous record in 2020, according to the note from Bank of America citing EPFR Global data.

Other highlights from the note include:

• US funds lead $2.1 billion of outflows from global equity funds in the week through Aug. 16
• About $1.3 billion leaves European stock funds in a 23rd straight week of redemptions
• Bond inflows extend for 21 weeks at $300 million
• Tech leads sectoral inflows, while financials and consumer have the biggest redemptions

--With assistance from Lisa Pham.

(Adds US stock futures in fifth paragraph)