Bank of America explains how a market bubble could soon form — and lays out the perfect trade to combat it
A Bank of America analyst sees the risk of a speculative stock market bubble increasing as expectations that the Federal Reserve will cut interest rates continue to rise.
In a note on Friday, BofA's Michael Hartnett highlighted a shift that he sees approaching, one that could lead to complications for investors—and he also shared his view on a trade to hedge such a scenario.
Geopolitical tensions and tariff updates from President Donald Trump have been headwinds for markets. But with the Israel-Iran ceasefire continuing to hold, the focus has shifted to the possibility of interest rate cuts in July.
Federal Reserve chairman Jerome Powell opted to leave rates steady at this month's meeting, but several top officials since then have come out in support for a cut as soon as next month.
As Hartnett's team sees it, investors have begun to adjust for a higher likelihood that Powell will pivot in his stance and cut interest rates. On top of that, Trump's " Big Beautiful Bill" is likely to result in lower taxes for corporations and some households.
"H2 bubble risk high as Trump/Powell pivot from tariffs to tax cuts/rate cuts to incite US$ devaluation/US stock bubble," Hartnett wrote.
Hartnett and his team go on to say that the best way for investors to play the market against the backdrop of a potential bubble is by owning US growth stocks and international value stocks, presenting it as a means of finding a balance between risk and reward.
They highlight this strategy as an effective way to guard against the potential impact of the predicted second-half bubble, as it offers exposure to growth in both US and international markets.
Other experts have shared similar strategies for handling this year's high levels of market and economic uncertainty. Investor Bill Gross said this week he was eyeing a small bull market for stocks and a small bear market for bonds, highlighting the strategy of buying one and selling the other.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
The Hill
12 minutes ago
- The Hill
How Wall Street powered to a record high and what comes next
A trade war. A real war with bombs dropped in the Middle East. A barrage of insults hurled by the president of the United States at the head of the Federal Reserve. The stock market has powered through all of that in the past few months to set a new record Friday and reward investors who stayed their ground through a volatile stretch. The S&P 500 closed at an all-time high of 6,173. While Wall Street can take a bow — and breath a sigh of relief — there's no let-up ahead. The pause President Donald Trump put in effect for many tariffs expires in early July. Second-quarter profit reports and upcoming economic indicators could reveal more about the impact of the tariffs that did go into effect. The Fed could face a tricky decision on interest rates. Here's a look at what's happened in markets and what could lie ahead. Trump appeared in the Rose Garden on April 2 and announced steeper-than-expected tariffs on almost all U.S. trade partners. He especially targeted China, eventually raising the duties on imports from China to 145%. Beijing retaliated by raising tariffs on U.S. goods to 125%. Within just four days, the S&P 500 fell about 12%, and the Dow Jones Industrial Average lost nearly 4,600 points, or about 11%. Trump shrugged off the stock market drop but he couldn't ignore the signs of trouble in the bond and foreign exchange markets. Tumbling prices for U.S. government bonds raised worries that the U.S. Treasury market was losing its status as the world's safest place to keep cash. The value of the U.S. dollar also sank in another signal of diminishing faith in the United States as a safe haven for investors. On April 9, Trump announced on social media a '90-day PAUSE' for most of the tariffs he'd announced, except those against China. The S&P 500 soared 9.5% for one of its best days ever. In May, the administration struck a trade deal with the United Kingdom. Then came the biggest news: The U.S. and China said that they were temporarily rolling back most of the tariffs they'd imposed on one another. The countries have indicated they've reached a deal, but details are scarce. Markets briefly got spooked when Trump threatened tariffs against the European Union, but he decided to hold off — until July 9 — as the countries negotiate. The trade war was pushed out of the headline by a real war this month as Israel and Iran attacked each other. The price of oil spiked, threatening to boost inflation and slow the global economy. A U.S. strike on Iranian nuclear facilities was followed by a cease-fire and oil prices dropped sharply. Relieved, Wall Street resumed its climb toward a new record. Trump wants the Fed to lower interest rates. The Fed says it needs to see the impact of Trump's tariffs before it can act. The president has taken to regularly bashing Jerome Powell, whose term as Fed chair expires next year. According to the Wall Street Journal, Trump could name his nominee to replace Powell unusually early, in an attempt to undermine him. The drama could influence trading in the bond and foreign exchange markets, and by extension on Wall Street. Strong profit reports for the first quarter helped offset the pressure from tariffs. Soon, companies will report results for the quarter ending June 30. While Wall Street analysts have lowered their expectations for earnings growth for the companies in the S&P 500, they still forecast solid growth of 5%, according to FactSet. The average quarterly profit growth over the past five years is 12.7%. Some companies withdrew profit forecasts amid the uncertainty created by tariffs, making forecasting even trickier. In a sign that stocks are still sensitive to trade developments, the S&P 500 fell briefly Friday afternoon after Trump said he was halting trade negotiations with Canada over its plans to continue with its tax on technology firms. The '90 day PAUSE' with most countries ends July 8. There's considerable uncertainty about what's going to happen after that. Trump's so-called reciprocal tariffs — aimed at countries with which the United States runs trade deficits and ranging from 11% to 50% — could snap back into place, something that risks spooking the markets. The president could also say that his negotiators are making progress with some or all of the targeted countries and give them another reprieve. Members of his administration seemed to indicate this week that there is some flexibility in the deadline.
Los Angeles Times
13 minutes ago
- Los Angeles Times
US stocks close at an all-time high just months after plunging on tariff fears
NEW YORK — U.S. stocks closed at an all-time high Friday, another milestone in the market's remarkable recovery from a springtime plunge caused by fears that the Trump administration's trade policies could harm the economy. The Standard & Poor's 500 rose 0.5%, finishing above its previous record set in February. The key measure of Wall Street's health fell nearly 20% from February 19 through April 8. The market's complete turnaround from its deep swoon happened in about half the time that it normally takes, said Sam Stovall, chief investment strategist at CFRA. 'Investors will breathe a sigh of relief,' he said. The Nasdaq composite gained 0.5% and set its own all-time high. The Dow Jones Industrial Average rose 1%. President Donald Trump's decision Friday to halt trade talks with Canada threatened to derail Wall Street's run to a record, but the market steadied. The gains on Friday were broad, with nearly every sector within the S&P 500 rising. Nike soared 15.2% for the biggest gain on the market, despite warning of a steep hit from tariffs. The broader market has seemingly shaken off fears about the Israel-Iran war disrupting the global supply of crude oil and sending prices higher. A ceasefire between the two nations is still in place. The price of crude oil in the U.S. is mostly unchanged on Friday. Prices have fallen back to pre-conflict levels. Investors are also monitoring potential progress on trade conflicts between the U.S. and the world, specifically with China. The U.S. and China have signed a trade deal that will make it easier for American firms to obtain magnets and rare earth minerals from China that are critical to manufacturing and microchip production, U.S. Treasury Secretary Scott Bessent said Friday. China's Commerce Ministry also said that the two sides had 'further confirmed the details of the framework' for their trade talks. But its statement did not explicitly mention an agreement to ensure U.S. access to rare earths, and instead said it will review and approve 'eligible export applications for controlled items.' An update on inflation Friday showed prices ticked higher in May, though the rate mostly matched economists' projections. Inflation remains a big concern for businesses and consumers. Trump's on-again-off-again tariff policy has made it difficult for companies to make forecasts. It has also put more pressure on consumers worried about already stubborn inflation. A long list of businesses from carmakers to retailers have warned that higher import taxes will likely hurt their revenues and profits. The U.S. has 10% baseline tariffs on all imported goods, along with higher rates for Chinese goods and other import taxes on steel and autos. The economy and consumers have remained somewhat resilient under those tariffs, though analysts and economists expect to see the impact grow as import taxes continue to work their way through businesses to consumers. 'While we also would have expected to already to be seeing a bit more pass through into the inflation statistics, we still expect these impacts to show up in a more meaningful way in the next few months,' said Greg Wilensky, head of U.S. fixed income and portfolio manager at Janus Henderson. The threat of more severe tariffs continues to hang over the economy. The current pause on a round of retaliatory tariffs against a long list of nations is set to expire in July. Failure to negotiate deals or further postpone the tariffs could once again rattle investors and consumers. The Federal Reserve is monitoring the tariff situation with a big focus on inflation. The rate of inflation has been stubbornly sitting just above the central bank's target of 2%. In a report Friday, its preferred gauge, the personal consumption expenditures index, rose to 2.3% in May. That's up from 2.1% the previous month. The Fed cut interest rates twice in late 2024 following a historic series of rate hikes to cool inflation. The PCE was as high as 7.2% in 2022 while the more commonly used consumer price index hit 9.1%. The Fed hasn't cut rate cuts so far in 2025 over worries that tariffs could reignite inflation and hamper the economy. Economists still expect at least two rate cuts before the end of the year. Bond yields held relatively steady. The yield on the 10-year Treasury rose to 4.27% from 4.24% late Thursday. The two-year Treasury yield, which more closely tracks expectations for what the Federal Reserve will do, edged up to 3.74% from late Thursday. All told, the S&P 500 rose 32.05 points to 6,173.07. The Dow gained 432.43 points to 43,819.27, and the Nasdaq added 105.55 points to 20,273.46. Stocks in Europe were mostly higher, while stocks in Asia finished mixed. Troise and Veiga write for the Associated Press.
Washington Post
17 minutes ago
- Washington Post
How Wall Street powered to a record high and what comes next
A trade war . A real war with bombs dropped in the Middle East. A barrage of insults hurled by the president of the United States at the head of the Federal Reserve. The stock market has powered through all of that in the past few months to set a new record Friday and reward investors who stayed their ground through a volatile stretch. The S&P 500 closed at an all-time high of 6,173.
