Bank of America strategists led by Michael Hartnett say they lean risk-off for the next three to four weeks. They cite 3% real yields, geopolitical risks, midterm uncertainty and weak AI-linked stocks. They also expect an October Fed hike to push long-end Treasury yields lower.
Bank of America strategists led by Michael Hartnett say they continue to lean risk-off for the next three to four weeks, citing 3% real yields, geopolitical risks, midterm uncertainty and weak price action in AI-linked stocks.
The team said the Fed needs to hike on Oct. 28. It flagged oil and the U.S., Iran, Russia and Ukraine situations as key risks, along with the rising chance of a Democratic sweep in the midterms.
Bull & Bear Indicator drops, ending sell signal
On AI, the strategists said spenders and lenders are under pressure. Private equity and business development company ETFs are back at their 2026 lows. Oracle's credit default swaps are a stress point.
The BofA Bull & Bear Indicator dropped sharply to 7.4 from 8.1, ending the sell signal triggered on May 26. Since then, the S&P 500 is up 3%, the Nasdaq 100 is down 0.2% and high-yield bonds are down 4.1%.
A Fed hike seen limiting downside
Hartnett and his team expect an October Fed hike and note CPI has been above the Fed's 2% target for 66 consecutive months. According to BofA, the move is meant "to restore credibility".
The strategists said a rate hike should limit downside for risk assets. They said it should push long-end Treasury yields down another 20 basis points in coming weeks. That holds as long as AI financing fears ease and the U.S. and China avoid new spats after the midterms.
Rotation into consumer discretionary
The team said it is adding exposure to beneficiaries of peak yields, including small caps, REITs and especially consumer discretionary. Investors are the most underweight consumer discretionary since July 2008, per BofA's October fund manager survey.
Strategists said they are not adding tech. The same survey shows investors the most overweight tech since August 2020. BofA said about $64.5 billion went into global stock funds in the week through Oct. 14. U.S. equities drew $39.1 billion, annualizing a record $636 billion.
Source: Investing.com
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