As inflows to U.S. stocks crest to biggest in more than a year, Bank of America says it's time to ‘chase the laggards'

Bank of America Global Research advises investors to "chase the laggards" within the equity market, specifically recommending small-caps, REITs, and biotech, as U.S. stocks saw a massive $57.7 billion inflow in the week ending Sept. 17—the largest since December 2024—contributing to $294 billion year-to-date. This strategy is underpinned by expectations of a "run-it-hot" U.S. policy, peaking bond yields, and the Fed cutting rates into an accelerating economy. However, BofA cautions about potential consumer price inflation stemming from asset price inflation, which could lead to government intervention in sectors like utilities if energy costs surge.

Analysis

Significant capital rotation is evident in U.S. markets, with equity inflows reaching $57.7 billion in the week ending September 17, the largest since December 2024, bringing the year-to-date total to a record $294 billion. This surge, coupled with the smallest bond inflow in three months ($14.3 billion) and the first cash outflow in seven weeks ($4.8 billion), occurs as the Federal Reserve cuts interest rates by 25 basis points into what Bank of America analysts describe as an accelerating economy. BofA's strategists suggest a "run-it-hot" policy from the administration implies bond yields have peaked, creating an opportunity to invest in underperforming, rate-sensitive sectors. They specifically recommend small-caps, where the Russell-2000 just logged its first record close in four years, as well as real-estate investment trusts (REITs) and biotech, citing Novo Nordisk's 28% decline as an example of an "unloved" stock. However, a significant risk accompanies this thesis: asset price inflation, which has added $6 trillion to U.S. equity wealth this year, could trigger consumer price inflation. This poses a political risk ahead of the 2026 midterm elections and could provoke government intervention to control prices, with the utilities sector flagged as particularly vulnerable should electricity costs continue to rise.

Key Decisions for Investors

• Consider rotating into undervalued, rate-sensitive sectors such as small-caps, REITs, and select biotech names, which have lagged the broader market and could benefit from the combination of peaking bond yields and economic acceleration.
• Investors should closely monitor inflation data and political rhetoric surrounding rising costs, as a second wave of inflation could prompt government price controls, posing a significant risk to specific sectors like utilities.
• Re-evaluate portfolio allocations in light of the performance disparity between large-caps and small-caps; the Russell-2000's recent record high could signal the start of a leadership rotation and a catch-up trade for laggard indices.