Bank of America Corp. strategist Michael Hartnett reiterated his call to sell US stocks, saying tech and artificial intelligence are forming a bubble and the Federal Reserve’s rate hikes may not be over, with rising bond yields posing a risk.
Hartnett, who correctly predicted last year that recession fears would fuel a stock exodus, recommended selling the S&P 500 at 4,200 — the index’s current level.
If the Fed “mistakenly” pauses rate hikes this year, US bond yields will reflect that by rising above 4%, “and if so we most certainly ain’t seen the last Fed rate hike of the cycle,” strategists led by Hartnett wrote in a note on Friday. The 10-year US Treasury yield traded at about 3.6% on Friday, having surged in the past week amid the debt-ceiling debate.
BofA said AI for now is a “baby bubble,” noting that in the past bubbles always started with “easy money” and ended with rate hikes. They cited the lesson from 1999, when a rally in internet stocks and strong economic data caused the Fed to restart monetary tightening, and the bubble in tech stocks burst nine months later.
The biggest “pain trade” in the next 12 months is the Fed funds rate rising to 6% instead of falling to 3%, given that the market expects rate cuts, according to the strategists.
US equities rallied on Thursday as optimism over steps toward resolving Washington’s debt-ceiling standoff outweighed concerns that the Fed may not suspend its rate-hiking campaign next month. The Nasdaq 100 soared to the highest level since April 2022, with its 14-day relative strength index closing in overbought territory for the first time since early February. The tech-heavy gauge is up 26% this year, one of the best performers among global indexes.
Tech stocks had their fifth week of inflows, while financials saw a third week of outflows, and REITs had the largest withdrawals since November 2022, BofA said, citing EPFR Global data.
Overall, equity funds had $7.7 billion outflows in the week through May 17, while bonds have seen inflows in the past eight weeks.