News: BofA Strategist Says Sell US Stocks as AI Seen Forming a Bubble

Bank of America Corp. strategist Michael Hartnett has restated his recommendation to sell US stocks, citing concerns about a potential bubble in the tech and artificial intelligence sectors. He also emphasized that the Federal Reserve's rate hikes may not be over and highlighted the risk posed by rising bond yields.

Hartnett, who accurately predicted last year's stock exodus driven by recession fears, advised selling the S&P 500 at its current level of 4,200.

In a note on Friday, Hartnett's team of strategists stated that if the Fed mistakenly pauses rate hikes this year, bond yields in the US could surpass 4%. They also suggested that if this happens, it would indicate that the last rate hike in the current cycle has not yet occurred.

Bank of America described the current state of AI as a "baby bubble," noting that historical bubbles have always started with loose monetary policies and ended with rate hikes. They referenced the lessons learned from the 1999 internet stock rally, where strong economic data prompted the Fed to resume tightening, ultimately leading to the burst of the tech stock bubble nine months later.

The strategists highlighted that the market's expectation of rate cuts makes the potential rise of the Fed funds rate to 6% instead of a decrease to 3% the biggest "pain trade" in the coming 12 months.

Despite concerns about the Fed's rate-hiking campaign, US equities rallied on Thursday due to optimism surrounding efforts to resolve the debt-ceiling standoff in Washington. The Nasdaq 100 reached its highest level since April 2022, and the tech-heavy index has performed strongly this year, up 26% and among the top performers globally.

According to Bank of America, tech stocks continued to attract inflows for the fifth consecutive week, while financials experienced outflows for the third week, and real estate investment trusts (REITs) saw the largest withdrawals since November 2022, based on data from EPFR Global.

In terms of fund flows, equity funds experienced outflows of $7.7 billion in the week leading up to May 17, while bonds have seen inflows for the past eight weeks.