Bank of America strategist Michael Hartnett is taking a defensive approach to stocks for the next month, citing higher yields, oil prices, midterm risk and a faltering AI trade. The bank's Bull & Bear Indicator has left the sell zone, but the bank still advises waiting to add risk.
Bank of America is taking a "risk-off" approach to stocks for the next month, according to strategist Michael Hartnett. He gave four reasons: higher yields and the need for the Federal Reserve to hike on Oct. 28, elevated oil prices tied to the wars in the Middle East and Ukraine, a rising risk of a Democratic sweep in the midterms, and recent price action in AI-linked names.
Inflation and rate hike bets drive the yield case
Treasury yields pulled back this week but remain near multi-decade highs, with inflation well above the Fed's 2% target. The consumer price index rose 3.7% in September from a year earlier. The producer price index increased 6.3% last month, its biggest annual gain since 2022.
Traders now price a more than 77% chance that the Fed raises its overnight rate by at least 25 basis points before year-end, according to the CME Group's FedWatch tool. Hartnett expects the central bank to be even more aggressive. He sees a hike as a way to reduce long-end Treasury yields another 20bps in coming weeks, limiting downside for risk assets as long as AI financing fears abate.
Midterms and AI debt worries add pressure
Kalshi traders see a 90% chance that Democrats win a House majority in the Nov. 3 election and a 63% probability that they take control of the Senate.
Meanwhile, the AI trade faltered this week amid concerns that some companies are issuing too much debt to build out their AI networks. CoreWeave has tumbled more than 22% this week, while the VanEck Semiconductor ETF is down 9%.
Sell signal fades, but caution stays
Separately, Bank of America's Bull & Bear Indicator, a 0-to-10 gauge, fell to 7.4 from 8.1, according to MarketWatch. The indicator had been flashing a sell signal since May, and the reading means investors are more bullish than not.
Hartnett advised clients to add exposure to beneficiaries of peak yields such as small cap stocks, REITs and consumer discretionary stocks.
Sources: CNBC, MarketWatch
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