BofA expects markets to remain cautious in the coming weeks. What does it recommend doing?

Risk aversion will dominate the markets in the coming weeks, according to Michael Hartnett, chief investment strategist at Bank of America. Investors are seeking protection from high interest rates, volatility stemming from AI-related trades, and the upcoming U.S. midterm elections, which will take place on November 3, according to the analyst’s assessment cited by Bloomberg.

The summer of “extremely bullish sentiment” has come to an end, Hartnett wrote. The market is under pressure from a widespread sell-off in global bonds, high energy prices, and persistent inflation. “Given that real bond yields are at 3%, we remain inclined to take a cautious stance over the next 3–4 weeks,” the analyst warned.

According to him, BofA expects the Fed to raise rates in October—the central bank needs to “restore confidence” after inflation exceeded its target for more than five years, Hartnett explains. This forecast is more hawkish than market expectations overall: the probability that the Fed will tighten monetary policy even further at its next meeting is currently estimated at just 15%, according to the CME’s FedWatch trader sentiment tool.

Investors are increasingly skeptical that large-scale investments in AI infrastructure—and the loans companies use to finance them—will pay off. Bets on AI have driven the rise in U.S. stocks, and inflows into technology funds this year have reached a record $196 billion on an annualized basis, according to BofA, citing data from EPFR Global.

"We are not increasing our exposure to the technology sector," Hartnett wrote. According to him, BofA prefers to increase its exposure to assets that stand to benefit from a rate hike, which is expected to push down yields on long-term U.S. Treasury bonds. These include small-cap stocks, real estate investment trusts, and consumer sector securities.

This article was AI-translated and verified by a human editor