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✅ Main takeaway:
Key takeaways
- Support from the Fed, the Trump administration and bearish buyers will likely keep stocks rallying well into next year, according to a recent research note from Bank of America.
- Michael Hartnett, President of Bank of America, expects signs of a continuing shift in risk aversion in the markets to come from bank stocks or widening credit spreads.
Technology stocks may be in a slump. One Wall Street strategist says now is not the time to pull back.
Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, sees stocks maintaining their momentum into the spring, supported by the Fed, the Trump administration and bearish buyers, according to a note on Friday.
Hartnett believes that an “expectations bubble” – rather than an actual financial bubble – lies behind the recent market weakness. For example, he cites government support for markets on what are said to be national security reasons; optimism about quantitative easing by the Fed; Tailwinds from tax cuts and tariff profit checks as dynamics supported markets.
Why is this important?
Artificial intelligence may dominate the headlines, but there are many factors influencing the outlook for the stock market, including interest rate expectations and liquidity. Easing financial conditions, a byproduct of lower interest rates or fiscal stimulus such as tax cuts, typically supports stock markets.
But he sees three reasons for optimism that stocks will regain their momentum.
- The first is “Fed policy,” which refers to the belief that the Fed will ease monetary policy to support financial markets, which are increasingly important to consumer spending.
- Then there’s the “Trump plan,” a reference to the White House’s desire to stimulate the economy and stock market in preparation for next year’s midterm elections.
- Finally, there is “Generation Z,” or retail investors whose FOMO mentality has made them reliable dip buyers.
These factors — plus a “mild” economic situation defined by low interest rates, steady earnings growth, and AI-led productivity gains that are moderating inflation — should keep the market moving, he wrote.
Hartnett expects the sell signal to come from bank stocks or credit spreads, both of which will reflect investor discomfort with rising debt levels as the Fed slows the pace of monetary policy easing. According to Hartnett, signs of risk aversion are unlikely to appear before May.
To be sure, the economic outlook has been highly uncertain for most of the year. The fog thickened during the government shutdown, delaying the release of inflation and labor market data that policymakers will want to take into account when setting interest rates next month. It is also not a given that AI will boost productivity and slow inflation in the near term.
a summary Investopedia Coverage of last week’s trading here.
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