Kevin Warsh will need to please two sides of the market with his speech on Friday, strategists warn
Bank of America says the bullish stock market might run into a wall this autumn.
Investors have brushed past the Iran war and a summer tech-stock swoon to keep pushing the stock market higher, but something has to give, and it probably will this autumn.
That's according to strategists at Bank of America led by Michael Hartnett, who see contrarians getting their chance to push back against bullish stock-market sentiment within months. For now, the strategists say the "summer consensus" that dictates buying assets that are perceived as riskier, such as stocks, is still in place.
Investors aren't worried about a recession, a Federal Reserve interest-rate hike, capital-expenditure cuts by hyperscalers or a Democratic sweep of both the House and Senate in the midterm elections in November, the strategists said. Instead, they are banking on rising corporate earnings, bond yields that don't spike higher and an economy that keeps growing, even if an inflation bump threatens.
That's got investors sitting in stocks and long investment-grade bonds, betting that short-term government bonds will drop, and buying the dollar, said Hartnett and his team, who are fans of gold (GC00) and commodities "to hedge policy and political risks to consensus."
As for what could be a turning point for this story, Hartnett and his team are looking at two things that could happen in the coming months. One is a possible resolution of the Iran war, which would prove the "last leg down" for oil prices.
The U.S. and Iran have been locked in a stalemate, with no clear resolution in sight, over how to end the war launched six months ago. Theoretically, a resolution to the conflict would provide a boost for stocks by removing a potential worry over inflation, as oil prices would tumble on the news. Gains could prove short-lived, though, as investors move past the war to refocus on economic worries and concerns about the artificial-intelligence trade.
The second challenge to the bull market will be posed by the U.S. midterm elections, with Polymarket indicating a 50% chance that the Democratic Party will win both houses of Congress. If Republicans lose the Senate, voters will be signaling that affordability and lower inflation matter more than lower taxes and regulation, said the strategists.
The stock market has largely been on the rise since President Donald Trump was elected in 2024. But what's perceived as a business-friendly Washington could face a challenge should Republicans suffer big losses in November, and that could also present difficulties for the stock market.
Hartnett and his team also weighed in on the recent stress in bond markets, saying Federal Reserve Chairman Kevin Warsh will need to strike a balance in his speech at the Jackson Hole economic symposium on Friday. He'll need to appear "credibly hawkish" on inflation to maintain credibility, yet also signal support for Treasury Secretary Scott Bessent's plan to buy back longer-term bonds, they said.
A successful speech could see a rally in stocks and other risk assets and even the dollar, but failure to strike that balance could see the 10-year Treasury yield "rip through" levels that sparked Bessent to announce the buybacks just over a week ago, the strategists warned. Those levels were 4.7% on the 10-year Treasury note BX:TMUBMUSD10Y and 5.3% on 30-year Treasury bond BX:TMUBMUSD30Y.
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-Barbara Kollmeyer
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