BofA Predicts Risk-Off Sentiment to Persist Until Mid-November, With Yields, Stocks and Dollar Potentially Falling Together

Bank of America strategist Michael Hartnett said investor risk-off sentiment could persist until late November, further signaling that unease over the AI trade and U.S. midterm elections is weighing on stock market performance.

Hartnett wrote in a note to clients on Friday: "We tactically maintain a risk-off stance until mid-November." He stated: "We expect a trading pattern of falling yields, falling stocks and a falling dollar."

Hartnett said the market still needs to fully price in the possibility of Democrats winning control of both the House and the Senate. He believes such an outcome would end the current low-tax, low-regulation policy environment, which would be detrimental to corporate earnings growth.

Hartnett said that if the European Central Bank or the French government steps in to reverse the selloff in French government bond yields, it could also serve as a signal for a rebound in risk appetite. He also said that the AI hyperscaler bond spreads that have recently unsettled the market could ease pressure if they peak due to capital expenditure cuts or companies announcing "extreme scale" equity financing.

Investors are still continuously pouring into AI-related sectors. Bank of America cited EPFR Global data showing that tech stocks recorded their largest weekly inflow since July. A Bank of America survey this month also showed that global investors' exposure to tech stocks is the highest since August 2020.

However, in recent days, investors have also begun rotating into defensive assets to avoid a series of risks, including rising oil prices, higher financing costs, and market concerns that the AI trade is starting to show bubble-like characteristics. Billionaire Ken Griffin warned this week that investors are "almost certainly" in an AI bubble.

As a gauge of market breadth, the equal-weighted S&P 500 index posted its best single-day performance relative to the market-cap-weighted S&P 500 index since 2024 on Thursday. Meanwhile, the more defensive consumer staples sector is on track for its best monthly performance since 1998.