These three stars need to align before investors rush back into stocks, Bank of America strategist says

By Jules Rimmer

Despite the steep drop in equity markets this week, investors should wait for several developments in other asset markets before rushing back into stocks, Michael Hartnett says

A U.S. 10-year Treasury yield under 4.5% is one prerequisite before investors load up on stocks, Michael Hartnett says.

The 3% drop in the S&P 500 and 6% tumble for tech stocks this week are not enough for one strategist, who has been in "risk-off" mode for several months, to change his mind.

Bank of America chief investment strategist Michael Hartnett has three key prerequisites for buying the market: that central banks stop tightening policy, U.S. 10-year yields decline to 4.5% BX:TMUBMUSD10Y and the price of oil falls below $80 a barrel.

If these things happen, Hartnett argues a year-end rebound and rally could start after the Thanksgiving holiday.

Until then, Hartnett reckons that the S&P 500 SPX will hold at 7,000 and that rather than exiting markets completely, investors will rotate risk into tech bonds, Europe and China.

Part of the reason the second half of 2026 has seen poor returns is the overly bullish consensus of investors in the summer, Hartnett contends. He hearkens back to the July Bank of America fund manager survey, in which a majority of poll respondents predicted no interest-rate hikes from the Federal Reserve, no Democratic midterm-election sweep and no cuts to artificial-intelligence capital expenditures. Even as late as last month's survey, asset allocators were the most overweight tech since August 2020.

This week the political consensus was proved wrong. A Democratic majority in both houses of Congress suggests higher taxes and regulation, a slowdown in data-center expansion and policies to address affordability issues and what's been called the K-shaped consumer economy. The lower growth these policies imply argues in favor of tech bonds over tech stocks XLK, consumer plays over energy XLE and small caps RUT over monopolies.

The AI capex boom, Hartnett argues, is already rolling over. He cites the following numbers for the hyperscalers, which speak for themselves: AI capex was $239 billion in 2024 and will be $1.3 trillion in 2027. Free cash flow for these companies was $239 billion in 2024 but will be negative $252 billion next year. U.S. debt issuance rose from $20 billion two years ago to $217 billion so far in 2026.

The slowdown suggests to Hartnett that "Magnificent Seven" spenders such as Amazon (AMZN), Alphabet (GOOG) and Meta (META) may outperform AI builders like chip companies and neoclouds like CoreWeave (CRWV) and Nebius (NBIS). The AI capex figure being bandied about for 2028, around $2 trillion, is too high, he argues.

A likely cluster of interest-rate hikes in December - not just from the Federal Reserve but also from the Bank of England, Bank of Japan and the European Central Bank - might herald the end of the tightening cycle, according to Hartnett. A drop in the geopolitical risk premium could trigger a correction in oil (BRN00) and also help deliver lower Treasury yields. These stars must align "before adding risk premium bigtime," he wrote.

During previous games of "political chicken," gold has rallied.

In this week's "Flow Show" strategy note, dispatched to clients Friday, Hartnett also offered some advice on gold (GC00).

He recommends buying gold at the start of the new year, because once the new Congress is sworn in, bipartisan political friction over the debt ceiling, which is set to hit $41.1 trillion in February, will begin almost immediately. When these games of "political chicken" occurred in 2011 and 2023, he notes, the price of gold rallied 12% and 17%, respectively.

-Jules Rimmer

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11-06-26 1027ET