By Jules Rimmer
No one expects hikes, a slowing economy, AI capex cuts or a Democratic sweep
Michael Hartnett summarizes the present market dynamic as “can’t buy bonds, can’t buy stocks.”
There are few bears in the market these days. Here’s why: No one expects a hard landing, a Fed hike before the midterms, hyperscaler cutbacks or a Democratic sweep.
President Donald Trump’s approval ratings are just starting to revive.
Bank of America’s chief equity strategist Michael Hartnett though, always has an eye for the contrarian trade and left tail possibilities. If any of those consensus predictions for the second quarter don’t materialize, then he recommends a series of strategies to exploit markets that are wrong-footed.
In a weekly assessment of markets that published Friday, Hartnett scrutinized what is being taken for granted. In the “no landing” scenario, he and his team of Anya Shelekhin, Jessica Guo and Myung-Jee Jung consider the prospects for the continuation of the economic boom. “Anything but bonds” would remain the default position of investors, neatly summarized as “can’t buy bonds, can’t sell stocks.”
If the market does unexpectedly weaken, however, the best way to play this would be through longer duration bonds BX:TMUBMUSD10Y (where yields might be expected to fall), high-dividend-paying stocks, defensives like consumer staples and perhaps surprising to some, big tech Magnificent 7 stocks MAGS that Hartnett views as ‘defensive monopolies.”
If the Fed confounded expectations and hiked between now and November, Hartnett would look to go long the dollar DXY, which might benefit from supportive interest rate differentials. He’d also add yield curve flatteners, a trading strategy that involves buying short-term bonds BX:TMUBMUSD02Y on the view they would underperform those of a longer maturity.
He said it’s an AI capex cut that would truly cause alarm, though, especially for the semiconductor stocks SOX that have flourished as the hyperscalers have sought to buy up all the chips in the marketplace. A capex cut, though, might boost the prospects of software companies that have been sold off in anticipation of AI models disintermediating their products.
Perhaps counterintuitively, if the Mag7 reduce their capex, analysts might prefer it as cash flow improves and less debt is issued.
Finally, if the Democrats defied present odds and win a clean sweep of the House of Representatives and the Senate at the midterm elections, then Hartnett forecasts a falling dollar, stocks and falling bond yields. In this situation, Bank of America would look to gold (GC00) as the contrarian play. If President Trump’s approval ratings on inflation haven’t improved by September, the call would be to raise gold exposure then, well in advance of the elections.
U.S. 30-year real rate is highestsince Nov’08
For the time being, Bank of America’s proprietary bull & bear indicator is still stuck on a “sell” signal, as financial conditions continue to tighten and real 30-year interest rates BX:TMUBMUSD30Y (the nominal yield minus inflation) having touched a high not seen since the global financial crisis. Reflecting that caution, money-market fund assets (a good measure of how conservative investors are at any given time) have a clocked all-time high. Hartnett warns investors to brace themselves for a chilly summer.
-Jules Rimmer
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07-10-26 0934ET
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