BofA’s Hartnett Says Flurry of Rate Cut Bets Drive Broad Rally

A rally in this year’s laggards shows investors are now going “all-in” on expectations of a flurry of central bank rate cuts next year, according to Bank of America Corp.’s Michael Hartnett.

Everything from distressed to heavily leveraged assets — some of the biggest underperformers this year — are being scooped up after the Federal Reserve signaled it was ready to start cutting rates next year. That rally is likely to continue until inflation surges again and a recession takes hold, Hartnett wrote in a note.

The rush has got investors dumping cash to load up on stocks, with global equity funds attracting $25.3 billion in the week through Dec. 13 — logging the biggest eight-week inflow since March 2022, the bank said, citing EPFR Global data. Money market funds had outflows of about $31 billion, the first redemption in eight weeks.

The S&P 500 Is Approaching A Record High

US stocks have bounced in the past two months on optimism around a peak in interest rates. The Fed further lifted sentiment this week by signaling it was ready to start cutting rates in 2024, sparking a rally in parts of the market — such as unprofitable tech stocks to regional banks — that had underperformed earlier this year. The S&P 500 is now less than 2% away from a record high.

Hartnett has remained broadly bearish on stocks this year despite the 23% rally in the S&P 500. He retained a cautious tone in the note dated Friday, warning that even if cash outflows continue, history shows that doesn’t automatically mean further gains for risk assets.