BofA's Hartnett explains why Wall Street is trading with 'no fear'

Investing.com -- Bank of America strategists say investors’ conviction that policymakers will always backstop the market is why stocks keep climbing without fear, even as bond yields surge and debt piles up.

The asset allocation rules of the road in the 2020s remain "Anything But Bonds," "Anywhere but China," "Anything But the Dollar," and "all-in on AI,” Michael Hartnett and his team said in a note.

This playbook is reinforced this year by conviction that policymakers see a nominal GDP boom as the solution to indebtedness and view the stock market as "too big to fail." That belief, they wrote, is “why Wall Street trades with no fear.”

On the macro front, Hartnett flagged that U.S. national debt is set to surpass $40 trillion within days and is on track to hit $50 trillion by 2029. The cost of servicing that debt has hit $1.4 trillion over the past 12 months and will keep climbing until five-year Treasury yields drop below 3.25%, he said, reinforcing the case for staying out of bonds.

He also noted the irony of U.S. stocks hitting new highs the same day the government sold 30-year Treasuries at their highest yield in 25 years.

Meanwhile, the BofA Bull & Bear Indicator fell to 9.3 from 9.7, still deep in "sell" territory, on weaker high-yield bond flows and outflows from tech and healthcare. Hartnett flagged that positioning is excessively bullish, though he noted "greed" is historically harder to reverse than "fear.”

Since the indicator’s inception, sell signals have preceded average losses of 2-3% for global stocks with a roughly 60% hit rate, but an actual bear market requires the added combination of excess profit optimism and policy tightening, not positioning alone.

Strategy-wise, the team’s trade recommendations spanned each leg of the playbook: long REITs, biotech, regional banks and small caps within the bond-averse trade; long Hong Kong property as a China re-rating play; long gold as a hedge against dollar debasement; and short AI bonds given heavy capex-driven issuance, paired with long "humiliation" trades in out-of-favor cyclical plays.

Hartnett also pointed to Texas’s governor race as a political wildcard for AI stocks, framing it as a referendum on affordability versus data-center buildout. A Republican win keeps stocks set to "rip into bubbly ’27," while a Democratic upset could spark a stock slump of more than 10% into year-end.

Flows were broadly positive across asset classes in the week to Aug. 12. Money market funds drew $25.4 billion, bonds $23.8 billion, stocks $16.1 billion, gold $6.3 billion — its biggest inflow since January — and crypto $300 million.

European equities logged their biggest inflow since February at $1.2 billion, while China equities saw their biggest outflow since May at $14.5 billion. Korea equities extended a seventh straight week of inflows at $2 billion, tech funds posted their biggest outflow in seven weeks at $1.2 billion, and materials drew $2.5 billion, the most since March.

U.S. equities saw a third straight week of inflows at $15.6 billion, while EM equities saw outflows resume at $11.9 billion.

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