Key Takeaways
- Support from the Fed, the Trump administration, and dip-buyers is likely to keep stocks rising well into next year, according to a recent research note from Bank of America.
- BofA’s Michael Hartnett expects the signs of a sustained risk-off shift in markets to come from bank stocks or widening credit spreads.
Tech stocks may be in a slump. One Wall Street strategist says now is not the time to pull out.
Michael Hartnett, Chief Investment Strategist at BofA Merrill Lynch Global Research, sees stocks maintaining their momentum into the spring, with support from the Fed, the Trump administration, and dip-buyers, according to a Friday note.
Hartnett argues that a “bubble in expectations”—not an actual financial bubble—lies behind the market’s recent weakness. As examples, he cites the government backstopping markets on what are said to be national security grounds; optimism about quantitative easing by the Fed; and a tailwind from tax cuts and tariff dividend checks as dynamics that have supported markets.
Why This Is Important
Artificial intelligence may dominate the headlines, but there are many factors that influence the outlook for the stock market, including interest rate expectations and liquidity. Easing financial conditions, a byproduct of rate cuts or fiscal stimulus like tax cuts, usually support stock markets.
But he sees three reasons to be optimistic that stocks will regain their momentum.
- First is the “Fed put,” which refers to the belief that the Federal Reserve will ease monetary policy to support financial markets, which are increasingly important to consumer spending.
- Then there’s the “Trump put,” referring to the White House’s wish to have the economy and stock market roaring heading into next year’s midterm elections.
- Finally, there’s the “Gen Z put,” or the retail investors whose fear-of-missing-out mentality has made them reliable dip-buyers.
These factors—plus a “goldilocks” economic set-up defined by declining interest rates, steady profit growth, and AI-driven productivity gains that moderate inflation—should keep the market chugging along, he wrote.
Hartnett expects the sign to sell will come from bank stocks or credit spreads, both of which would reflect investors’ unease with rising debt levels as the Fed slows the pace at which it eases monetary policy. According to Hartnett, those risk-off signals aren’t likely to flash before May.
Granted, the economic outlook has been highly uncertain for most of the year. The fog only grew thicker during the government shutdown, which delayed the release of inflation and labor market data that policymakers will want to consider when setting interest rates next month. It’s also not a given that AI will boost productivity and slow inflation in the near term.
Recap Investopedia’s coverage of last week’s trading here.
