Bank of America: Everyone firmly believes in the "rate cut" and "Trump" trade, so it's time to "buy the rumor, sell the news"

As the expectation of interest rate cuts gradually heats up, combined with the increased probability of Trump's re-election, the US stock market is gradually dominated by two trends: "interest rate cut trading" and "Trump trading".

On July 18th, Michael Hartnett, Chief Strategist at Bank of America, led a team to release the latest research report stating that in the week ending this Wednesday, the US stock market saw the fourth largest weekly inflow of funds in history. It is expected that around September 18th (Fed's September interest rate meeting) and November 5th (announcement of the US election results), "buy the rumor, sell the news" will still be the prevailing trend.

Currently, market pricing shows a 100% probability of a rate cut by the Fed in September, a 75% probability of Trump winning the November election, and a 68% probability of a "soft landing" for the US economy.

Based on the current market situation, Hartnett believes that market risk appetite is rotating rather than diminishing. It is expected that funds will flow from the US dollar to gold, from large-cap stocks to small-cap stocks, and the market will shift from momentum trading to volatility trading.

Inflows into Small-Cap Stocks, Bonds, and Commodities

The report cites EPFR Global data tracking fund flows in global markets over the past week:

Equity inflows of $47.7 billion, bond inflows of $21.6 billion, cash inflows of $4.6 billion, gold inflows of $1.8 billion, and cryptocurrency inflows of $1.7 billion.

Gold: Inflows of $1.8 billion, the largest since March 2022;

Bonds: Inflows of $21.6 billion, the largest since October 2020, the eighth largest weekly inflow in history;

Government Bonds: Inflows of $5 billion, the 11th consecutive week of inflows, marking the longest continuous inflow since November 2023;

Investment Grade Bonds: Inflows of $9.1 billion, the 38th consecutive week of inflows;

High Yield Bonds: Inflows of $4.4 billion, the largest weekly inflow since November last year;

US Stocks: Inflows of $44.8 billion, the fourth largest inflow in history;

European Stocks: Outflows of $1.4 billion, the ninth consecutive week of outflows;

Tech Stocks: Inflows of $2.4 billion, the third consecutive week of inflows, the largest net inflow in four weeks;

Financial Stocks: Inflows of $1.3 billion, the largest weekly inflow since November last year;

Small-Cap Stocks: Inflows of $9.9 billion, the second largest weekly inflow in history

For Bank of America clients, the current asset under management has reached $3.7 trillion, with equity positions accounting for 62.5%, bonds for 19.7%, and cash for 11%; the inflow of Chinese bond funds is the largest in 4 months.

In addition, Bank of America's bull-bear indicator has risen to its highest level since March, recording a reading of 6.5. Generally, when this indicator rises to 8, it indicates that the stock market has "overheated," triggering a "sell signal."

The report explains that the recent rise in the bull-bear indicator is driven by continuous inflows into high-yield bonds and emerging market bonds, indicating strong technical aspects of the credit market.

Overall, compared to earlier when the rise was concentrated in large-cap tech stocks, the upward trend in the US stock market is starting to "broaden," expanding to small-cap stocks, bonds, and gold.

"Counter-consensus": Will Trump's Reelection Bring Deflation?

Currently, the market generally believes that as the probability of Trump's reelection continues to rise, his combination of domestic tax cuts + external tariffs + immigration restrictions may increase inflation risks, thereby raising bond yields.

However, the Hartnett team has a different view. The report states that the current global economic environment is different from the strong macroeconomic environment and low interest rates during the 2018 trade tensions. New tariffs may instead bring recession risks to the global economy, thereby benefiting the bond market.

Historical data shows that when the US experiences an economic recession, the 2/10-year US Treasury yield curve tends to steepen, and the same trend is currently occurring.

The report also predicts that considering the sharper decline in growth expectations for the US economy compared to Europe and Japan, if this trade tension mainly focuses on the tech sector and is not as widespread, its impact on the US dollar may not be as positive as the market generally expects, and gold as a safe-haven asset may benefit more.