Bank of America strategists maintain a risk-off posture for the next three to four weeks, citing 3% real yields, geopolitical instability, and weak price action in AI-linked equities. The team, led by Michael Hartnett, argues that the Federal Reserve needs to hike rates on Oct. 28 to restore credibility, noting that consumer price inflation has remained above the central bank's 2% target for 66 consecutive months.
Hartnett and his colleagues expect a rate increase to push long-end Treasury yields down by another 20 basis points in the coming weeks, which they believe will limit downside risk for assets. This outlook depends on AI financing fears easing and the United States and China avoiding new trade disputes following the midterm elections. Key diplomatic meetings are scheduled between President Donald Trump and Chinese President Xi Jinping at the APEC summit in Shenzhen on Nov. 18 and the G20 summit in Miami on Dec. 14.
The bank's Bull & Bear Indicator fell sharply from 8.1 to 7.4, ending the sell signal triggered on May 26. Since that date, the S&P 500 has risen 3%, while the Nasdaq 100 has declined 0.2% and high-yield bonds have dropped 4.1%. The strategists identify oil prices and conflicts involving the United States, Iran, Russia, and Ukraine as primary risks, alongside the rising probability of a Democratic sweep in the midterms.
In the AI sector, pressure is mounting on spenders and lenders. Private equity and business development company exchange-traded funds have returned to their 2026 lows, and credit default swaps for Oracle (NYSE:ORCL) represent a significant stress point. The team is not adding to technology holdings, as their October fund manager survey indicates investors are the most overweight in tech since August 2020. They further note that an AI bubble in 2027 has become consensus among market participants.
Conversely, BofA is increasing exposure to "peak yield" beneficiaries, including small caps, real estate investment trusts, and consumer discretionary stocks. Investors are currently the most underweight in consumer discretionary since July 2008. Longer-term positioning remains long gold, commodities, and emerging markets, while reducing secular underweights in bonds and China.
Looking toward 2027, the analysts expect markets to be driven by artificial intelligence developments. They advise monitoring semiconductor prices closely, as fresh gains would be bullish, whereas a price rollover would signal tighter AI credit and a peak in capital expenditure growth.
Fund flows through Oct. 14 showed $64.5 billion entering global stock funds, on pace for a record $1.3 trillion this year. U.S. equities attracted $39.1 billion, annualizing a record $636 billion. Bonds received $11.8 billion and gold $100 million, while $53.1 billion exited cash funds and $600 million left crypto assets.
Treasuries logged their 16th consecutive week of inflows, totaling $3.6 billion, marking the longest streak since August 2024. Investment-grade bonds brought in $3.5 billion, while municipal bonds recorded inflows of $4.5 billion for the 26th week in a row. Emerging market debt saw inflows extend to an 11-week run with $800 million added, contrasting with high-yield bonds which saw outflows of $900 million for a third straight week.
Emerging market equities drew $17.7 billion in a third week of inflows. Japan saw inflows resume at $400 million, while Europe experienced outflows of $1.5 billion. Among U.S. fund styles, large cap led inflows at $32.5 billion. Technology dominated sector inflows with $10.7 billion, while financials and consumer funds recorded the largest outflows at $1.4 billion and $600 million respectively.