As monetary market fund yields are expected to decline by at least 100 basis points in the coming quarters due to the Federal Reserve’s actions, the question arises: should I buy US Treasuries given the $38 trillion national debt? Or invest in corporate bonds with credit spreads at a 20-year low? Should I rather purchase stocks with a cycle-adjusted price-to-earnings (CAPE) ratio as high as 40, or opt for gold that has just experienced a "vertical surge"? This presents a complex situation.
As global central banks enter a rate-cutting cycle, investors find themselves at a challenging crossroads. Recently, Michael Hartnett, Chief Investment Strategist at Bank of America, illustrated this intricate investment scenario: mainstream assets are presenting their own dilemmas against a backdrop of declining monetary market yields, leaving investors in a quandary.
Hartnett's commentary clearly underscores the current market risks: the soaring US government debt diminishes the safe-haven appeal of sovereign bonds; corporate bonds offer inadequate risk compensation due to narrow spreads; US stock valuations are at historical highs, creating significant downward pressure; while gold, despite its strong momentum, carries notable risks for chasing high prices.
A flood of capital is pouring into risk assets and gold. Despite Hartnett’s cautious outlook, recent inflows have surged into tech stocks and gold in unprecedented volumes. According to reported data, during the past week, there has been a massive exit of funds from cash equivalents ($24.6 billion) into riskier assets. Specifically, the stock market attracted $28.1 billion in funds, with tech stocks recording a record inflow of $10.4 billion in a single week.
The gold market is equally vibrant, witnessing a cumulative inflow of $34.2 billion over the past 10 weeks, marking a historical high. Additionally, the Chinese stock market is experiencing the largest weekly inflow since April 2025, amounting to $13.4 billion. This "buy everything" momentum underscores a strong appetite for risk in the market amid rate-cut expectations.
The current global rate-cutting wave has generated immense liquidity. According to Hartnett, the total market capitalization of global equities has soared by $20.8 trillion this year. However, beneath this market exuberance, risks are quietly accumulating. He warns that if asset prices decline and impact the wealthy, the economy could deteriorate sharply.
At the same time, fissures are starting to appear in the credit market, termed “Krunchy Kredit.” Hartnett predicts that if key sectors like banks and brokerages further weaken, or if high-yield bond credit default swap (HY CDX) spreads widen beyond 400 basis points, it would signal a deeper phase of deleveraging or a risk of liquidation, forcing the Fed to adopt more aggressive rate cuts.
Hartnett’s “BIG” strategy: Finding Direction Amid Uncertainty In facing a complex market environment, Hartnett reiterates his “BIG” investment strategy, favoring Bonds, International markets, and Gold.
Regarding bonds, he maintains a bullish stance on long-term US Treasuries, predicting that the yield on 30-year bonds will drop below 4%. He believes that rate cuts by the Fed, the end of quantitative tightening (QT), and the disinflationary effects of artificial intelligence (AI) on the labor market will support bond prices. The report notably mentions that zero-coupon bonds are the best hedge against credit event risks.
On the international market front, Hartnett continues to see potential in international equities, forecasting the Hang Seng Index to rise above 33,000 points. Bank of America’s global earnings per share (EPS) growth model predicts a 9% global EPS growth over the next 12 months, exceeding market consensus.
Moreover, while the MSCI global index has a price-to-earnings ratio as high as 19.6, excluding the US, the global market P/E ratio is only 15, making it more attractive. He firmly believes that market dynamics will shift from the "American exceptionalism" narrative of the first half of the 2020s to a "global rebalancing" theme in the second half.
As for gold, Hartnett remains highly bullish, maintaining his prediction that gold prices could exceed $6,000 per ounce by next spring. Although gold was listed as the “most crowded trade” in a recent fund manager survey, he sees this as a misconception. He points out that high-net-worth clients at Bank of America have only a 0.5% allocation to gold, while global fund managers have only a 2.4% allocation, far from saturation. In his view, only significant geopolitical easing or black swan events, such as an AI bubble burst leading to skyrocketing real interest rates, could end the current bull market in gold.