Bank of America strategist Michael Hartnett is advising investors to position for gains in commodities, Chinese equities, and U.S. consumer discretionary stocks, while taking a negative stance on the U.S. dollar. The strategy reflects ongoing trade tensions, concerns over U.S. fiscal stability, and a broader shift away from American assets.
Hartnett highlights commodities as a key hedge against inflation, a softer dollar, and geopolitical uncertainty. “Who owns the chips, rare earths, minerals, oil, wins the AI war,” he wrote in a research note.
Regarding China, BofA points to several indicators suggesting rapid progress, including a breakout in the ChiNext index, a 43% year-on-year surge in Chinese tech exports to $234 billion, and the renminbi reaching its strongest level against the Japanese yen since August 1992. These trends signal that China is closing the gap in the AI race with the United States.
Strategists also emphasized that China has sufficient energy resources — including alternative supplies and imports of Russian oil — to support its expanding AI infrastructure.
“Buy China: biggest equity winners since Trump inauguration are U.S.-China AI war winners (U.S. semis, Asia tech, Canada/LatAm materials),” the note said.
One of the more contrarian views from BofA is its bullish stance on U.S. consumer discretionary stocks. The equal-weighted performance of the sector relative to the S&P 500 has fallen to levels last seen during the 2008 financial crisis and the COVID-19 market collapse, while globally the sector is trading at three-year lows versus energy stocks.
BofA believes the sector has already priced in stagflation risks more heavily than others, calling it its “fave contrarian long to trade Trump post-war pivot to address affordability & slump in approval ratings, and great way to hedge H2’2020s electoral shift from “populist capitalism” to “populist socialism”.”
The bank also favors yield curve steepening trades, expecting the spread between 2-year and 30-year U.S. Treasury yields to widen beyond 140 basis points. Weak consumer conditions, declining capital expenditure plans among small businesses, and a sharp shift in rate expectations — from 125 basis points of cuts last October to just 5 basis points now — all point to further monetary easing ahead.
Conversely, the bearish outlook on the U.S. dollar is driven by the impact of tariffs on its safe-haven appeal, concerns over NATO-related tensions, and potential disruptions to the petrodollar system.
“Fed pressure to cut to grow, U.S. policymakers will trade weaker dollar rather than higher bond yields to attract foreign capital,” the strategists wrote.
BofA also expects inflation (CPI) and earnings forecasts to peak in the second quarter, with the 2-year Treasury yield remaining below 4% and the U.S. dollar index falling to new lows under 96.
Some macro-focused investors warn of a potential bond market sell-off, noting that previous episodes saw yields rise by 65 to 96 basis points. They also highlight that incoming Federal Reserve Chair Kevin Warsh’s start date on May 15 could influence yields, with the 2-year Treasury historically rising by an average of 55 basis points in the three months following a new Fed chair’s appointment.
The past week saw a record $172.2 billion outflow from money market funds, although BofA noted that the move was largely driven by tax-related factors, with average April outflows over the previous four years closer to $41 billion.
Elsewhere, U.S. equities attracted $17.4 billion in inflows, while bonds saw $7.9 billion for a 51st consecutive week of inflows. Gold and cryptocurrencies each drew $1.2 billion.
Regionally, Europe experienced $4.7 billion in outflows, its largest since November 2024. China saw $10.8 billion in outflows, Korea recorded a record $2.5 billion withdrawal, Japan lost $4.4 billion, and emerging market equities collectively saw $10.5 billion in outflows. Technology funds alone recorded $3.8 billion in redemptions.