BofA strategist says the door is wide open for stock-market bulls, if breadth improves

BofA strategist Michael Hartnett suggests the stock market rally can continue if oil price spikes are contained and market breadth improves, requiring participation from banks, mid-caps, and major retailers. Hartnett highlights strong market sentiment driven by a robust U.S. economy and potential tax cuts, anticipating a shift in focus to fewer Fed rate cuts in the latter half of 2025. He recommends an overweight position in emerging markets due to AI-driven commodity demand and a weaker dollar benefiting EM economies, noting significant inflows into U.S. assets and Brazilian equity funds.

Analysis

Bank of America strategist Michael Hartnett suggests the current stock market rally has potential to continue, provided that recent spikes in oil prices are not sustained and market breadth significantly improves. For a bull market to fully materialize, Hartnett emphasizes the necessity of participation from banking sector stocks, mid-cap equities, and major retailers like Walmart and Costco, especially considering headwinds from energy price volatility. This outlook is underpinned by a still robust U.S. economy, an apparent peak in trade war uncertainty, and the prospect of tax cuts, collectively fostering a potential "Goldilocks" market scenario. Hartnett's earlier contrarian call in May to acquire 30-year Treasurys at a 5% yield is reportedly performing well, offering a stable base for equities. A notable shift in market focus is anticipated in the second half of 2025, moving from the 57 global interest rate cuts already enacted towards the one or two easing measures expected from the U.S. Federal Reserve. Strategically, Hartnett advocates for an overweight position in emerging markets (EM), citing AI's substantial demand for commodities predominantly supplied by EM economies, and a U.S. dollar that has weakened by 9% year-to-date, which alleviates debt servicing costs for EM nations and boosts commodity prices and local currency bond attractiveness. Supporting this, Brazilian equity funds recently recorded their largest inflow in three years, amounting to $400 million in the last week. Despite prevailing narratives of U.S. exceptionalism, U.S. assets have seen $2.6 trillion in inflows decade-to-date, with 2025 inflows annualizing at $575 billion, potentially the third-largest year ever, and foreign buying of U.S. assets annualizing at $138 billion, which would mark the second-largest year. The general market sentiment, according to provided signals, is "strongly positive" with a score of 0.65.

Key Decisions for Investors

• Investors should closely monitor improvements in market breadth, specifically the performance of banks, mid-cap stocks, and key retailers (e.g., Walmart, Costco), as a critical indicator for the rally's sustainability.
• Consider an overweight allocation to emerging markets, particularly those rich in commodities, to potentially benefit from AI-driven demand and a weakening U.S. dollar trend.
• Maintain vigilance over oil price movements, as sustained increases could negatively impact the market outlook and require adjustments to sector exposures.
• Factor in the anticipated shift in Federal Reserve policy towards fewer easing moves in late 2025 when making long-term interest rate sensitive investment decisions.