Fed rate cut may not be a good thing! Bank of America warns: Bubble risks resurface, recommends buying bonds and gold
After the Fed rate cut, market excitement exacerbates bubble risks. Bank of America strategist Michael Hartnett warns investors to buy bonds and gold on dips to hedge against economic recession and inflation. He points out that despite market expectations of further Fed policy easing, S&P 500 earnings will grow by 18%, but bubble risks still exist. Hartnett also mentioned that international stocks and commodities are good hedges against inflation
According to the financial news outlet Zhitong Finance, Michael Hartnett, a strategist at Bank of America, warned that the excitement in the stock market following the Fed's rate cut has intensified bubble risks, making bonds and gold attractive tools to hedge against economic downturn or rising inflation.
The strategist, who was bearish on the U.S. stock market last year and previously favored bonds for 2024, stated that the current market expects the Fed to further ease policies and that S&P 500 index constituent companies' earnings will grow by around 18% by the end of 2025.
Hartnett mentioned, "The risks are not getting any better, so investors are forced to chase the uptrend." However, he cautioned that "bubble risks" are resurfacing and advised buying bonds and gold on dips.
He also noted that in the event of an economic soft landing, stocks outside the U.S. and commodities are good targets, with the latter serving as a hedge against inflation. He pointed out that international stock prices are relatively low and are starting to outperform U.S. stocks.
Global stock markets rose last Thursday as the market optimistically viewed the Fed's 50 basis point rate cut as timely initiation of an easing cycle, avoiding a U.S. economic recession. The S&P 500 index, after sliding from July levels, returned to historical highs. The tech-heavy Nasdaq 100 index surged by 2.6%, marking the largest single-day gain in over a month.
Following the Fed's rate cut, the S&P 500 index hit a new all-time high.
However, signs of caution emerged in the market on Friday.
A survey conducted earlier this month by Bank of America found that investor confidence improved slightly due to bets on economic growth rebounding. However, a U.S. economic recession and accelerated inflation are seen as the biggest tail risks in the market.
Hartnett had previously warned of a potential bubble in tech stocks amid the artificial intelligence frenzy