Bank of America strategist Michael Hartnett and his team have maintained a cautious outlook on financial markets, identifying lower Treasury yields, declining oil prices and a weaker US dollar as conditions needed before adopting a more favourable position on risk assets.
The strategists said they intend to remain risk-off until crude oil falls below $70 a barrel and the yield on the 10-year US Treasury note declines below 4.5%.
According to the bank, oil prices are already moving towards the identified threshold, while the Treasury yield could fall below 4.5% in December or January.
A decline in the US dollar is another requirement, although the currency is currently moving in the opposite direction. The strategists expect the dollar to reach a peak in February or March.
Interest Rate Outlook Remains Central to Market Strategy
Hartnett’s team expects monetary tightening to continue influencing financial markets over the coming months.
The strategists anticipate more than 70 interest rate increases globally between June 2026 and May 2027, with the current tightening cycle potentially ending no earlier than the Federal Reserve’s April Federal Open Market Committee meeting.
Markets are currently pricing in additional Federal Reserve rate increases in December, January and March.
Bank of America also noted that the Federal Reserve last achieved its 2% inflation target in February 2021.
The combination of elevated interest rates, persistent inflation and tighter financial conditions underpins the strategists’ preference for maintaining a defensive investment position.
S&P 500 Scenarios Range From Below 7,000 to Above 8,000
Bank of America outlined contrasting scenarios for the US equity market.
In its more favourable scenario, the S&P 500 could rise above 8,000 points, supported by continued investor purchases during market declines.
The strategists described this potential source of demand as “insatiably buy-the-dip flows.”
Under the less favourable scenario, the index could fall below 7,000 points if a stronger dollar, reduced liquidity and further central bank rate increases coincide with slowing economic activity.
The bank identified high-yield bonds, US and emerging market equities, energy stocks, healthcare companies and large-cap consumer businesses as particularly exposed under this scenario.
These projections represent conditional market scenarios rather than specific forecasts of index performance.
Government Intervention Influences Investor Positioning
Hartnett’s team said relatively few investors are holding outright bearish positions, partly because policymakers increasingly regard equity markets as “too big to fail.”
The strategists pointed to government measures intended to support financial markets in several Asian economies.
Taiwan has announced a $15 billion fund to support domestic equities, while authorities in South Korea and China have introduced similar initiatives.
Bank of America suggested that expectations of policy intervention may discourage investors from establishing substantial short positions, even when they express concerns about market valuations or economic conditions.
The distinction between negative sentiment and actual portfolio positioning remains an important element of the bank’s analysis.
US Household Equity Wealth Supports Consumption
The strategists also examined the relationship between household wealth and economic activity in the United States.
According to Bank of America, the value of US household equity holdings declined by approximately $3 trillion over the past month.
Despite that decrease, household equity wealth remained approximately $9 trillion higher for 2026.
The bank noted that consumer spending accounts for around 70% of US gross domestic product.
Hartnett’s team argued that elevated household wealth, particularly among higher-income consumers, could continue supporting consumption and make an economic recession less likely.
However, the strategists also indicated that changes in equity market performance could influence household wealth and spending expectations.
Fund Manager Survey Could Signal Changes in Sentiment
Bank of America distinguished between investors who express negative market expectations and those who have reduced their exposure through short positions or underweight allocations.
The strategists said many investors remain emotionally bearish but relatively few are “physically” bearish.
They identified the bank’s November 17 fund manager survey as a potential indicator of changes in positioning.
According to the team, a decline in expectations of an economic “boom” from 47%, combined with an increase in cash allocations from 3.9% to more than 4.2%, would make investor sentiment less of an obstacle to market performance.
The figures would suggest a reduction in optimism and a greater preference for holding cash.
US Political Developments Reinforce Caution Towards Bonds
Bank of America also highlighted recent political developments in the United States.
The strategists noted that eight Senate seats had shifted from Republican to Democratic control, a movement they said had occurred only four times across 39 elections since 1950.
According to the bank, the political developments reinforce the investment approach described as “Anything But Bonds.”
Under this approach, investors remain reluctant to purchase US Treasury securities until yields reach approximately 5.5% to 6.5%.
The strategists linked this positioning to concerns about the outlook for government bonds and the broader economic and political environment.
Global Equity Funds Attract $98.3 Billion in Weekly Inflows
Fund flow figures cited by Bank of America showed substantial demand for equities during the week ended November 11.
Global equity funds attracted $98.3 billion, their largest weekly inflow since June.
Bond funds received $300 million, while gold funds recorded inflows of $49 million.
Cryptocurrency funds experienced withdrawals of $1.9 billion, and money market funds recorded outflows of $17.9 billion.
US equity funds attracted $63.6 billion, also their largest weekly inflow since June, extending their inflow streak to six consecutive weeks.
Chinese equity funds received $2.1 billion, bringing cumulative inflows over a record five-week buying period to $88 billion.
Technology Funds Continue to Attract Capital
Technology-focused funds recorded inflows of $8.9 billion during the latest week.
Over five weeks, cumulative inflows reached $53.5 billion, the largest such total since July.
Materials funds moved in the opposite direction, experiencing withdrawals of $2.4 billion during the week.
The sector’s cumulative outflows reached $8 billion over three weeks.
Energy funds recorded their first weekly outflow in six weeks, with investors withdrawing $1.1 billion.
The figures showed continued demand for technology investments alongside reduced allocations to materials and energy funds.
Emerging Markets and Japan Extend Inflow Streaks
Emerging market equity funds attracted $14.7 billion, marking their seventh consecutive week of inflows.
Japanese equity funds received $4.2 billion, extending their inflow streak to five weeks.
European equity funds returned to positive flows, attracting $400 million.
In fixed income, investment-grade bond funds recorded their eighth consecutive weekly inflow, receiving $1 billion.
High-yield bond funds attracted $400 million, marking their third consecutive week of inflows.
US Treasury funds experienced renewed withdrawals of $600 million, while emerging market debt funds recorded a second consecutive weekly outflow of $1.5 billion.
Financial Conditions Remain Key to Bank of America’s Outlook
The latest fund flow figures indicate that investors continue allocating substantial capital to equities despite concerns about interest rates, liquidity and economic growth.
Hartnett’s team remains cautious, however, maintaining that lower oil prices, declining Treasury yields and a weaker dollar are necessary before adopting a more favourable position towards risk assets.
The strategists also continue to monitor investor positioning, household wealth, monetary policy and political developments.
Their analysis presents a range of potential market outcomes, with financial conditions and the direction of interest rates remaining central to the outlook.