Bank of America (BofA) strategists have flagged a potential “bubble risk” in the second half of the year, leading them to maintain a positive stance on their 'BIG' diversified basket of bonds, international equities and gold.
The US investment bank’s strategists describe themselves as “happy cyclical buyers” of US Treasury bonds, citing expectations of a slowing US macroeconomic environment, Federal Reserve rate cuts, and falling yields. They note, however, that the “only risk for bonds” lies in the formation of an equity bubble.
BofA is shifting focus from the US market to European (including UK) and Chinese equities, driven by concerns over “fiscal excess” in the US.
The argument is that the exceptional secular outperformance of US stocks relative to international peers is “over.” In this context, gold is viewed as the “best hedge of [a] coming US dollar bear market.”
Despite this cautious backdrop, BofA’s strategists caution that “tactically, trading rules are nearing sell signals,” but add that “bubbles ignore trading rules.” They say the risk of a bubble in the second half remains high unless US non-farm payrolls fall below 100,000 or long-dated bond yields exceed 5%.
They outline a scenario where a political and monetary pivot – described as a “Trump/Powell pivot from tariffs to tax cuts/rate cuts” – could spark a US dollar devaluation and a US stock bubble, with the Nasdaq 100 index potentially surging toward 30,000.
This rally would act as a “cure” to reduce the US debt burden through an economic boom.