- Bank of America’s Michael Hartnett told clients in a note Friday, “We stay tactically risk-off until mid-Nov,” and said to “expect down-in-yields, down-in-stocks, down-in US dollar trade.” The call is another sign of how jitters around the AI trade and the US midterm elections have held back equity markets.
- Hartnett said the market still needs to fully price a Democratic victory in both the House of Representatives and the Senate. That outcome would be negative for earnings growth, he said, because it would end the current low-tax, low-regulation regime.
- Signals of a revival in risk appetite would include the European Central Bank or the French government stepping in to reverse the rout in French bond yields. A peak in AI hyperscaler debt spreads, which have spooked markets recently, could also come from capital spending cuts or an “extreme equity issuance announcement,” he said.
- Positioning remains heavy in tech, with EPFR Global data cited by the bank showing the largest weekly inflows into technology stocks since July. A Bank of America survey this month also showed global investors are the most exposed to tech since August 2020.
What Happened?
Hartnett laid out his tactical view in a note to clients on Friday as investors weigh the AI trade and the approaching midterm elections. In recent days investors have also taken a defensive turn, seeking shelter from climbing oil prices, higher borrowing costs and worries that the AI trade is showing bubble-like conditions. Billionaire Ken Griffin warned this week that investors are “almost certainly” in an AI bubble. On Thursday, the equal-weighted S&P 500 had its best day since 2024 relative to the market-cap-weighted index, and defensive consumer staples stocks are on track for their best month since 1998.
Why It Matters?
Hartnett’s call for falling yields alongside falling stocks implies bonds would act as a hedge if equities keep sliding, while a weaker dollar would mark a broader pullback from US assets. Tech exposure at its highest since August 2020 combined with a sudden rotation into equal-weight and staples suggests positioning is crowded, which can amplify selloffs. His point that a Democratic sweep is not fully priced means the election itself could be a catalyst for further repricing of earnings expectations. The links he draws to French bond yields and hyperscaler credit spreads show how stress in rates and credit markets is now feeding directly into equities.
What’s Next?
The key window is mid-November, after the midterms, when Hartnett expects the risk-off phase could end. Watch French bond yields and any intervention by the ECB or the French government, which he flags as a potential turning point. Spreads on AI hyperscaler debt are the other signal, with capex cuts or a very large equity raise among the triggers he cites. Continued strength in equal-weight and consumer staples stocks would confirm the defensive rotation is still under way.
Affected Tickers and Coins: SPY, QQQ, RSP, XLP, TLT, UUP, BAC
Source: Bloomberg
