According to Michael Hartnett, Chief Strategist at Bank of America, market dynamics have fundamentally shifted in 2026: the AI theme is experiencing significant internal divergence, and capital flows are moving from the U.S. to Japan and South Korea. Faced with geopolitical uncertainty and volatile U.S. equities trading at elevated levels, Hartnett suggests that investors should "trade oil" in the short term and "hold gold" for the medium term. For U.S. stocks to break out of the current stalemate characterized by extreme bullishness yet stagnation, Hartnett argues that two major external shocks—a collapse in Middle Eastern oil prices or an easing of U.S.-China trade tensions—are urgently needed.
Is a Dramatic Shift in Market Style Underway? From Hartnett’s perspective, the market logic of 2026 differs sharply from that of the previous two years. If 2024 and 2025 were dominated by "AI front-runners," 2026 may see a significant style shift. Hartnett believes the market is moving away from capital-intensive "spenders" (such as the Magnificent Seven tech giants) and toward infrastructure "builders" (like semiconductors and raw materials). Capital is also shifting away from "the disrupted" (software stocks) and flowing into "applicators" of AI technology (such as banking stocks). However, such sharp sector rotations carry risks. Currently, technology, telecommunications, and financial sectors collectively account for 56% of the S&P 500 index. If the market value decline of leading decliners outpaces gains from leading advancers, the broader market could face a crash risk.
Geopolitical Trading Rule: Short-Term Oil Dominance, Mid-Term Gold Superiority Regarding oil, gold, and geopolitical shocks, Hartnett believes oil will be the top-performing asset in 2026, influenced by U.S.-Iran relations and other geopolitical tensions. But this does not imply investors should blindly hold oil. Based on historical data spanning 90 years, Bank of America offers the following insight: in the first three months following a geopolitical shock, oil is the clear outperformer, averaging an 18% gain, surpassing gold (+6%) and U.S. stocks (+4%). However, over a six-month horizon, the situation reverses—gold continues to outperform, with average gains expanding to 19%, while U.S. stocks stagnate and oil gives back all its earlier gains. Thus, Hartnett’s strategic mantra is succinct: "Leverage geopolitical volatility = Trade Oil, Own Gold." The former is a short-term tactical play, while the latter represents a medium-term strategic allocation.
Breaking the Deadlock: U.S. Stocks Need Two Major "External Shocks" Looking at the broader market, investors are currently caught in a contradictory puzzle. On one hand, extremely bullish positioning and strong profit expectations signal a "sell." On the other, tax incentives and expectations of interest rate cuts suggest "buy the dip." This contradiction has led to choppy, range-bound trading at high levels. Hartnett argues that for risk assets to break meaningfully higher from current elevated levels, internal momentum alone is insufficient. Instead, two exogenous shocks are needed to reshape the fundamental narrative. First, a change in Middle Eastern regimes that ensures ample future oil supply could trigger an oil price collapse, fundamentally easing inflationary pressures. Second, a potential U.S.-China trade agreement in April could provide relief. Hartnett suggests the Trump administration may need to cut tariffs to curb inflation and boost approval ratings, which have sunk to 42% overall and just 35% on inflation management.
Capital Flow Warnings A deeper shift is occurring in capital flows, as the "U.S. exceptionalism" narrative appears to be fading. Hartnett projects that for every $100 flowing into global equity funds in 2026, only $26 will go to U.S. stocks—the lowest share since 2020, a stark contrast to the peak of $92 out of $100 in 2022. Data show international equity funds have recorded a record four weeks of net inflows ($64.6 billion), primarily directed to South Korea (memory chip theme) and Japan (reflation narrative). Notably, South Korean equities saw their largest six-week net inflow in history, totaling $17.7 billion.
In closing, Hartnett revisited Bank of America’s well-known Bull & Bear Indicator, which currently reads 9.4—positioned in "extreme bullish" territory, just below the historical peak of 9.5. Historical analysis indicates that over the past 25 years, the indicator has only breached 9.5 three times. Following such extreme readings, markets typically experienced significant corrections within three months, with the Nasdaq averaging an 8.6% decline.
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