BofA's Hartnett Sees Risk of Stock Bubble on Fed Pivot, Tax Cuts
(Bloomberg) -- The risk of a speculative stock-market bubble is increasing as expectations of US interest-rate cuts draw massive investment flows into equities, according to Bank of America Corp.'s Michael Hartnett.
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With the US moving closer to trade deals with China and other partners, tariff wars and geopolitics are becoming less of a concern for investors. Instead, they are pricing a greater chance of Federal Reserve rate cuts and waiting to see if President Donald Trump's tax bill is passed in Congress next month.
A 'pivot from tariffs to tax cuts/rate cut' could lead to a high risk of a bubble in the second half of the year, and a further weakening of the dollar, Hartnett's team at BofA wrote in a note.
Already this year, $164 billion has flowed into US equities, on course for the third-largest annual inflow in history, the note said, citing data from EPFR Global.
The S&P 500 index is within striking distance of a record high, while 10-year Treasury yields have slid more than 30 basis points off their May highs. Swap markets are currently expecting that the Fed will cut rates four times over the next 12 months.
The 'best way to gain exposure is via 'long US growth/long global value' equity barbell,' Hartnett added, referring to an investment strategy that seeks to strike a balance between risk and reward.
Yet absent a bubble in artificial intelligence, earnings growth acceleration is the 'most plausible upside surprise' for US and global stocks in the second half of the year, the team added.
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