Bank of America’s Michael Hartnett expects the stock rally to fade.
Stock investors are behaving as if there has been more progress on trade negotiations.
The current setup amounts to “buy the expectation, sell the fact,” Hartnett said.
With one US trade deal announced this week, markets are upbeat about more progress to come, but investors should be wary of buying into trade optimism, Bank of America’s chief investment strategist wrote.
BofA’s Michael Hartnett said the market’s bounce since April’s historic spasm of volatility suggests that investors are front-running the possibility of lower tariffs and more trade deals this quarter. The S&P 500 is up nearly 14% from April lows, but the rally leaves little room for more gains.
“We expect ‘buy the expectation, sell the fact,'” Hartnett and his team wrote. In their view, the rally will fade as more deals are announced.
That’s an unsettling prospect for analysts who have increasingly shaped their market outlooks around easing trade tensions. Deutsche Bank said recently that it thinks a meaningful dip in the tariff rate could deliver a sharp rally that pushes the S&P 500 to 6,150 by year-end.
Morgan Stanley, meanwhile, is particularly focused on the US reaching a trade deal with China, which could serve as a key catalyst for the benchmark index.
But Hartnett is more bearish. In predicting that the rally will lose steam regardless of whether tariffs come down, he said he continues to favor international equities over US shares, as well as bonds and gold.
The analysts said that investors are overexposed to the theme of “US exceptionalism.” The America-first trade is “clashing with new populist policies of higher tariffs, smaller government, lower immigration, fewer wars,” and other policies that will weigh on the country’s growth.
In November, Hartnett similarly warned that a long period of outperformance in US markets was nearing the end.
For now, investors should stay invested in five-year Treasurys, at least until news on tax cuts, a China trade deal, and rate cuts.
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