'Santa Flaws Rally' has legs so don't sell stocks yet, advises Bank of America strategist

By Jules Rimmer

Michael Hartnett suggests one more contrarian trade involving an inflation bet

With financial conditions having crested, belief riding high that the economy will be OK in 2026, and support from the Fed and a generation of equity investors unfamiliar with bear markets, the transition to risk-off is not likely before May.

That's according to Bank of America's Michael Hartnett, who says that, while most asset allocators are likely to stay bullish on stocks and less so on bonds, a "Santa Flaws Rally" may be entering its final stages.

In his weekly "Flow Show" report, the bank's chief equity strategist points out that it's no surprise that bubble expectations, if not a bubble itself, are behind the recent stalling of risk assets. Alongside the artificial-intelligence bonanza, the Fed is not just cutting rates with equity indexes near their highs but contemplating more quantitative easing in the first half of 2026 with Trump's tax cuts set to be augmented - possibly - by $2,000 stimulus checks cut to some Americans, he said.

Financial conditions have rarely been so easy.

If the Trump administration wants an economy motoring into the 2026 midterms, it needs the stock market strong and the U.S. consumer still spending, Hartnett observes. You have, then, what he calls the "Fed put" (underwriting markets through accommodative monetary policy) the "Trump put" (underwriting markets through a governing agenda) and the "Gen Z put" (underwriting markets with a relentless buy-the-dip mentality).

Supereasy financial conditions persuade Hartnett that investors have reached "trough spreads" (by which he means the incremental return demanded by fixed-income investors for corporate bonds over U.S. Treasurys).

Traders, therefore, should be short bonds, especially the hyperscaler bonds of which there has been a big increase in issuance of late, in anticipation of those spreads widening into 2026. Tech companies simply don't have the cash to fund their capital expenditures without resorting to credit markets in increasing size.

Hartnett believes the signal to adjust to a risk-off strategy will be problems within banking stocks and/or credit-spread expansion.

The strategist has maintained for some time that the real propulsion behind the strength in risk assets has been the easiness of global liquidity, stemming from the 167 central-bank rate cuts recorded worldwide in the last 12 months. This momentum is slowing, though. Only 81 are forecast by Bank of America economists in the next year, and some of the major players like the ECB are on hold, while the Bank of Japan by rights should be hiking at least twice.

There have been 167 rate cuts in the last 12 months with only 81 expected in the next year.

So the bulk of the big global ease is behind investors, and this explains why bitcoin (BTCUSD) is suddenly trading more than 20% off its recent highs and below $100,000.

Hartnett suggests one final contrarian trade: to back the U.S. consumer-price index falling to 2%. Expectations are that inflation will head higher owing to tariffs and its stickiness since the spike of 2022, but Hartnett reckons Trump knows that his party's performance in the midterms is dependent upon an affordability/cost-of-living argument.

Hartnett makes a straightforward prediction that if consumer-price inflation is at 4%, then Trump's approval rating is below 40%, and he loses, but if CPI drops to 2%, his rating jumps above 45%, securing a victory in which Republicans maintain control of the House.

Hartnett's call to buy the US 10-year BX:TMUBMUSD10Y down to 3.5% yield and the long bond BX:TMUBMUSD30Y down to 4% yield would look pretty good in that scenario.

-Jules Rimmer

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11-14-25 1825ET