MW Now is not the time to own bonds, says Bank of America. These are safer bets.

By Jules Rimmer

'Anything but bonds' will be theme of the second half of the decade, and investors should look to international, small-cap and midcap stocks and gold, Band of America says

Emerging markets' time has come, according to Bank of America.

International stocks, emerging markets and gold will shine in the second half of the 2020s, with investors making it clear that it's time for anything but bonds. The trends of dollar DXY debasement, stronger emerging-market currencies, the end of deflation in Japan, China and Europe, and stronger commodities will combine for a secular bull market in international and emerging market equities EEM.

That's the unambiguous message from Bank of America chief equity strategist Michael Hartnett in his weekly Flow Show note titled "Long Detroit, short Davos," published Friday. Outlining the big investment themes dictating markets, Hartnett also elaborates on his view of U.S. stock markets and predicts a shift away from the Magnificent Seven group of stocks MAGS and the megacap technology sector as a whole toward small-cap and midcap stocks.

Hartnett's preferred vehicles are exchange-traded funds exploiting resources GNR, emerging markets EEM, midcaps MDY, small caps IJR and gold GLD.

The first half of this decade saw a bond-market humiliation. The U.S. long bond lost half of its value, its Japanese counterpart lost 45% and the flows out of those assets funded a bull market in gold and U.S. technology stocks IYW. Hartnett draws a comparison between the current environment and the 1970s, when "wage and price controls, pro-cyclical fiscal and monetary policies, U.S. dollar debasement led to a shift away from the Nifty 50 large cap names into small stocks."

Hartnett believes President Donald Trump will wage the midterm election battle on affordability issues for voters and will use the "invisible hand to visible fist" - Hartnett's metaphor for government intervention - to control prices in banking, healthcare and energy, which could impact the big players in these sectors. Populist politics means themes like reshoring and rebuilding America's manufacturing sector and looking for a boom on Main Street will receive more emphasis. This plays into the hands of small-cap and midcap stocks, Hartnett opines.

Last autumn, Hartnett made a punchy forecast that gold would reach $6,000 an ounce, and he's sticking with his recommendation to buy, with the metal's hedging characteristics, the dawning of a new world order, fiat-currency debasement and fiscal excess all reinforcing his stance. Hartnett notes that average price gain during gold's (GC00) last four serious bull markets was 300%, implying $6,000 this time around.

Emerging markets outperformed U.S. equity indexes in 2025, and Hartnett remains bullish on the asset class. His favorite market is China MCHI, as he believes deflation there is ending and domestic consumption will rebalance higher than its current level of 40% of gross domestic product (compared with something more like 70% in the United States). Hartnett believes that China's 3% weighting in the MSCI ACWI is simply too low compared with the U.S.'s 64%.

On that theme, Hartnett noted that the huge outflows this week from exchange-traded funds for Chinese stocks listed on U.S. exchanges were most likely evidence that the Chinese government is trying to cool down the stock market.

Chinese ETFs experienced massive outflows in the last two weeks. Traders believe the Chinese government's "national team" is behind the selling in an attempt to tamp down speculative froth in the market.

Chinese ETFs saw an exodus of $49 billion this past week, following $6 billion the week before, and Hartnett suspects that the "national team" - a term coined to describe a group of government-affiliated funds that often act in concert - is responsible for trying to tamp down some of the market's upward impetus.

This would coincide with recent efforts by China's securities regulator to crack down on market manipulation and increase margin requirements as a means of curbing excessive speculation in China's equity markets CN:SHCOMP.

-Jules Rimmer

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

January 23, 2026 11:32 ET (16:32 GMT)

Copyright (c) 2026 Dow Jones & Company, Inc.