Bank of America is taking a cautious approach to stocks for the next month as the bank sees a growing near-term case against stocks. Strategist Michael Hartnett outlined four reasons for the stance. Hartnett cited higher yields and the need for the Federal Reserve to raise rates on October 28. Hartnett cited elevated oil prices due to the wars in the Middle East and Ukraine. Hartnett also cited the rising risk of a Democratic sweep in the midterm elections. Hartnett's fourth reason was recent price movements in artificial intelligence-linked stocks.
Treasury yields remain near multidecade highs despite declining this week, as inflation remains well above the Fed's 2% target. The consumer price index rose 3.7% in September from a year earlier. The producer price index, a measure of wholesale inflation, increased 6.3% last month, the biggest annual gain since 2022. CME Group's FedWatch tool shows traders pricing a more than 77% chance that the Fed will raise its overnight rate at least 25 basis points before year-end.
Hartnett expects the Fed to take a more aggressive approach. Hartnett expects an October rate increase to restore credibility, citing 66 consecutive months with consumer price inflation above the Fed's 2% target. Hartnett expects the increase to lower longer-term Treasury yields another 20 basis points in coming weeks, limiting declines in risk assets if AI financing fears ease.
Traders increasingly expect Democrats to gain control of Congress in the upcoming midterm election. Kalshi traders assign a 90% chance to Democrats winning a House majority in the November 3 election. Kalshi traders assign a 63% probability to Democrats gaining control of the Senate.
AI-linked stocks weakened this week amid growing concerns that some companies are issuing too much debt to build AI networks. CoreWeave shares have fallen more than 22% this week. The VanEck Semiconductor ETF is down 9% this week. Hartnett advised clients to add exposure to potential beneficiaries of peak yields, including small-cap stocks, real estate investment trusts and consumer discretionary stocks.
Bank of America Adopts Risk-Off Stance Amid Rising Yields, Geopolitical Tensions, and AI Stock Volatility
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Summary
Bank of America has shifted toward risk-off assets, citing rising yields, geopolitical tensions, and AI stock swings. Strategist Michael Hartnett pointed to higher Treasury yields, Fed rate hike risks, elevated oil prices, and the CFT agenda as key concerns. CoreWeave and the VanEck Semiconductor ETF saw sharp declines. Hartnett suggested small-cap stocks, REITs, and consumer discretionary names as top picks amid peak yields.
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