Wall Street’s continued appetite for risk reflects a widespread belief that policymakers will step in to protect markets when necessary, helping stocks climb even as government debt expands and bond yields remain elevated, according to Bank of America strategist Michael Hartnett.
Hartnett and his team said the defining asset-allocation themes of the 2020s remain “Anything But Bonds,” “Anywhere but China,” “Anything But the Dollar,” and “all-in on AI.”
Those strategies have received additional support this year from expectations that policymakers regard strong nominal GDP growth as a way to manage rising debt burdens and increasingly treat the equity market as “too big to fail.”
That conviction, the strategists said, is “why Wall Street trades with no fear.”
U.S. debt reinforces Hartnett’s cautious view on bonds
Hartnett highlighted America’s rapidly expanding debt burden as another reason investors may remain reluctant to increase exposure to fixed income.
U.S. national debt is expected to exceed $40 trillion within days and could reach $50 trillion by 2029, according to the strategist.
Debt-servicing costs have climbed to $1.4 trillion over the past 12 months and are likely to remain elevated until the five-year Treasury yield falls below 3.25%, Hartnett said.
He also pointed to the contrast between record equity markets and increasingly expensive government borrowing. U.S. stocks reached new highs on the same day that the government sold 30-year Treasury securities at their highest yield in 25 years.
The divergence reinforces the unusual environment in which investors continue embracing equities despite mounting fiscal pressures.
Bull & Bear Indicator remains in sell territory
Bank of America’s Bull & Bear Indicator declined to 9.3 from 9.7, remaining firmly within “sell” territory.
The decline reflected weaker flows into high-yield bonds alongside withdrawals from technology and healthcare funds.
Hartnett warned that investor positioning remains excessively bullish, although he noted that “greed” has historically proved more difficult to reverse than “fear.”
Since the indicator was introduced, sell signals have been followed by average declines of between 2% and 3% in global equities, with a success rate of roughly 60%.
However, Hartnett stressed that positioning alone is generally insufficient to create a full bear market. Such a downturn would typically also require excessive optimism about corporate profits alongside tighter monetary or fiscal policy.
BofA identifies trades across major market themes
Hartnett’s team outlined investment ideas corresponding with each component of its broader market framework.
Within the “Anything But Bonds” theme, the strategists favour REITs, biotechnology companies, regional banks and small-cap stocks.
For exposure to a potential Chinese market re-rating, they favour Hong Kong property stocks, while gold remains their preferred hedge against potential dollar debasement.
The team also recommends short positions in AI-related bonds, reflecting expectations for substantial debt issuance as technology companies finance heavy capital expenditure programmes.
These positions are paired with long exposure to what Hartnett describes as “humiliation” trades — previously unpopular cyclical investments that could benefit if investor leadership broadens beyond today’s dominant themes.
Texas election could become wildcard for AI stocks
Hartnett also identified the Texas governor’s race as an unusual political risk for artificial intelligence-related equities.
He characterised the contest as potentially becoming a referendum on household affordability versus the rapid expansion of power-intensive data centres.
According to Hartnett’s scenario, a Republican victory could leave equities positioned to “rip into bubbly ’27,” extending the AI-driven market advance.
A surprise Democratic victory, however, could trigger a stock-market decline of more than 10% heading into the end of the year, he suggested.
Investors continue directing money into markets
Fund flows remained broadly positive during the week through August 12 despite Bank of America’s caution over investor positioning.
Money-market funds attracted $25.4 billion, while bond funds received $23.8 billion and equity funds drew $16.1 billion.
Gold recorded inflows of $6.3 billion, its largest weekly total since January, while cryptocurrency products attracted approximately $300 million.
European equities received $1.2 billion, their strongest inflow since February. In contrast, Chinese equities suffered $14.5 billion of withdrawals, their largest outflow since May.
South Korean equities recorded $2 billion of inflows, extending their positive streak to seven consecutive weeks.
Tech funds see outflows as materials attract capital
Sector-level flows showed investors beginning to rotate capital despite continued enthusiasm surrounding artificial intelligence.
Technology funds experienced $1.2 billion of withdrawals, their largest outflow in seven weeks, while materials attracted $2.5 billion, the strongest inflow since March.
U.S. equities received $15.6 billion, marking a third consecutive week of inflows, while emerging-market equities returned to outflows with withdrawals totalling $11.9 billion.
The figures reinforce Hartnett’s broader argument that investors remain heavily committed to risk assets even as positioning becomes increasingly stretched.
For Bank of America, the combination of policy-backstop expectations, strong nominal growth and continued enthusiasm around AI helps explain why equity markets continue advancing despite rising government debt and historically elevated long-term borrowing costs.