Here's one thing investors should wait on before going all-in on stocks, according to Bank of America

• Bank of America strategist Michael Hartnett isn't buying stocks until credit spreads blow out.
• He still expects a recession shock to drive stocks to new lows in the first quarter of 2023.
• "Once credit spreads show recession priced-in, we are all-in," Hartnett said in a Friday note.

Bank of America strategist Michael Hartnett is waiting for a blowout in credit spreads before going all-in on stocks, according to a Friday note.

That's because he still expects a recession shock to materialize in the coming months, which would drive stocks to new lows in the first quarter of 2023.

Higher interest rates in particular could have an outsized, but delayed, impact on the economy as central banks around the world seek to tame inflation. According to Hartnett, global central banks have implemented 243 rate hikes so far in 2022. "That's 1 rate hike [for] every trading day."

Rate hikes take time to work their way through the economy, and the end result is a recession, according to the note. "Bond market now pivoting from inflation to recession," he said, adding that a fourth-quarter rally in risk assets could materialize as some central banks "blink" on their current tightening policy.

"But we say 'recession shock' equals new highs [in] credit spreads [and] new lows [in] stocks in Q1," Hartnett said, adding that the "recession trade is always long bonds, short stocks."

Credit spreads will often surge to higher levels when uncertainty in the stock market and economy reaches a crescendo. The spreads measure risk appetite in credit markets, as investors demand higher yields when buying at a time of heightened risk.

But so far, credit spreads have remained relatively subdued. The ICE BofA US High Yield Index Option-Adjusted Spread was at just 4.76% as of Thursday, still below the July peak of about 6% and the March 2020 peak of nearly 11%. During the Great Financial Crisis, the spread hit a high of nearly 20%.

While a bear market rally could send the S&P 500 to 4,000, it will still be too early for the Federal Reserve to pivot away from its current rate hike policy, according to the note.

"Norm is Fed starts cutting only once US unemployment rate [gets above] 5.5%; and rising unemployment rate normally means higher defaults and wider credit spreads," Hartnett said. The US unemployment rate currently sits at 3.5%.

"If like us you believe job losses mean new highs in spreads it's a bear market rally, lows yet to be seen, and rules of road remain," he said.

And one of those rules means investors should wait on buying stocks: "Once credit spreads show recession priced-in, we are all-in." So far, that's no where near close to happening.