BofA's Hartnett: Three Signals Must Align Before Stocks Rally

Bank of America chief investment strategist Michael Hartnett says investors should wait for three specific signals before buying stocks again: central banks stop tightening, the U.S. 10-year yield falls to 4.5%, and oil drops below $80 a barrel. A 3% fall in the S&P 500 and a 6% tumble in tech stocks this week did not change his mind. He has been in "risk-off" mode for several months.

If those three conditions are met, Hartnett argues a year-end rebound and rally could start after the Thanksgiving holiday. Until then, he expects the S&P 500 to hold at 7,000. He does not recommend exiting markets completely. Instead, investors will rotate risk into tech bonds, Europe and China.

Why did the second half of 2026 disappoint?

Hartnett blames an overly bullish consensus among investors in the summer. He points to the July Bank of America fund manager survey. A majority of respondents predicted no interest-rate hikes from the Federal Reserve, no Democratic midterm-election sweep and no cuts to artificial-intelligence capital expenditures. As late as last month's survey, asset allocators were the most overweight tech since August 2020.

This week the political consensus proved wrong. A Democratic majority in both houses of Congress suggests higher taxes and regulation, a slowdown in data-center expansion, and policies targeting affordability and the so-called K-shaped consumer economy. The lower growth these policies imply argues in favor of tech bonds over tech stocks, consumer plays over energy, and small caps over monopolies, Hartnett says.

Is the AI capex boom already rolling over?

Hartnett argues it is, and he cites the hyperscaler numbers. AI capital expenditure was $239 billion in 2024 and will reach $1.3 trillion in 2027. Free cash flow for these companies was $239 billion in 2024 but will be negative $252 billion next year. U.S. debt issuance rose from $20 billion two years ago to $217 billion so far in 2026.

The slowdown suggests that "Magnificent Seven" spenders such as Amazon, Alphabet and Meta may outperform AI builders like chip companies and neoclouds such as CoreWeave and Nebius. Hartnett also pushes back on the 2028 AI capex forecasts. The figure being bandied about, around $2 trillion, is too high, he says.

What could end the tightening cycle?

A cluster of interest-rate hikes in December might do it. Hartnett expects hikes not just from the Federal Reserve but also from the Bank of England, the Bank of Japan and the European Central Bank. Together they could herald the end of the tightening cycle. A drop in the geopolitical risk premium could trigger a correction in oil and help deliver lower Treasury yields.

These stars must align "before adding risk premium bigtime," Hartnett wrote in his "Flow Show" strategy note, dispatched to clients Friday.

What about gold?

Hartnett recommends buying gold at the start of the new year. His reasoning is congressional. Once the new Congress is sworn in, bipartisan friction over the debt ceiling will begin almost immediately. The ceiling is set to hit $41.1 trillion in February. When these games of "political chicken" occurred in 2011 and 2023, gold rallied 12% and 17% respectively.

The takeaway for investors: patience until the three signals flash, then a rotation — not an exit — into tech bonds, Europe, China and, come January, gold.