Bank of America Hartnett Outlook 2025: Q1 US Dollar, US Stocks, Q2 Non-US Stocks, Gold and Commodities for the Year, US Treasuries Bottoming at 5%

In the past November, some of the most speculative assets from the "Trump trade" generated the highest returns. Looking ahead to December and 2025, how will global assets perform?

Recently, Michael Hartnett, Chief Investment Officer of Bank of America Securities, released the 2025 investment outlook report. He stated that global markets will continue the theme of "big policies, big moves, and big tail risks," and that the global economy may further diverge entering 2025. The U.S. economy will exhibit "inflationary prosperity," while other regions face the risk of "deflationary recession."

Regarding which assets to invest in for 2025, Hartnett suggests "going all in" and provides five major investment strategies:

1. In Q1, go long on "U.S. prosperity" and short on the "global recession" theme

"U.S. inflationary prosperity" and "global deflationary recession" may lead to an overshoot in the dollar and stock markets in the first quarter. Investors have heavily positioned in the Trump trade with expectations of a rising dollar, rising U.S. stocks, and rising bond yields. We believe that U.S. small-cap stocks (Russell 2000 Index) are the best trade for positioning for an overshoot, due to the inflationary combination of U.S. tariffs, immigration controls, deregulation, and tax cuts.

In contrast, Europe, Asia, and emerging markets will enter 2025 with significantly weakened economic momentum, especially in manufacturing (PMI 45-50), even before the trade war broke out; banks/financials were the best-performing stock sectors in Europe, Japan, and China in 2024, but now entering the first quarter, they are the most vulnerable/best short opportunity, as investors may be forced to fully price in the "global deflationary recession."

2. In Q2, buy non-U.S. stocks, betting on a shift to easing policies in Europe/Asia

By spring, we expect a combination of the Federal Reserve turning hawkish and "policy panic" in Europe and Asia; "American exceptionalism" will peak in the second quarter, indicating: a. a significant adjustment in the U.S. stock market (strong dollar + weak global economy = unfavorable, as 30% of S&P 500 earnings come from overseas);

b. Asset allocation will shift towards cheap international stocks and currencies, attracted by more Chinese fiscal easing, new European fiscal easing (German elections/Russia-Ukraine conflict easing), and aggressive rate cuts by the European Central Bank, all in response to anticipated "U.S. tariffs;

A combination of lower interest rates, cheaper currencies, and lower oil prices = significant easing of financial conditions in Asia and Europe in the second quarter, supporting a rotation of funds into European cyclical stocks and emerging market currencies.

3. Throughout the year, go long on gold and commodities, expecting inflation to rise above expectations

Due to unexpected inflation, commodities are optimistic about copper and raw materials.

Fiscal excess, economic isolationism, and artificial intelligence will continue to overwhelm any deflationary factors by 2025; if the Trump administration allows a second wave of inflation to occur, it would be a political dereliction of duty, but economic prosperity means higher rather than lower inflation, and the U.S. will be at full employment at the beginning of 2025.

The Bank of America investment clock indicates that the bullish "recovery" phase for the stock market in 2024 (declining interest rates and rising earnings per share) may be replaced by the bullish "prosperity" phase for commodities in 2025 (rising earnings per share and rising interest rates); the "bear steepening" of the yield curve in the first quarter will signal this transition, with bonds beginning to reflect "inflationary prosperity" rather than "interest rate cuts."

We believe that as inflation exceeds expectations, gold (buy below $2,500/ounce), cryptocurrencies, and unpopular commodity asset classes will perform excellently in 2025. Once "policy panic" occurs in Asia and Europe, it is best to invest through copper, raw materials, Latin America, and commodities.

4. Buy U.S. Treasury bonds with a yield of 5%

In 2025, if U.S. Treasury yields rise to 5%, it presents a huge opportunity. If U.S. Treasury yields overshoot to 5%, it would be a significant buying opportunity. This level would trigger: a. volatility and losses in risk assets; b. "inflationary prosperity" reaching its peak; c. innovative solutions to reduce the U.S. budget deficit. A disorderly rise in bond yields is the biggest threat to the stock market, but we believe that U.S. Treasury yields are more likely to be below 4% rather than above 5% by the end of 2025... this would turn the volatility in global stock markets in the first half of the year into a 5-10% increase by the end of the year.

5. Go long on cryptocurrencies and Chinese stocks to hedge against AI/tech stock bubble risks

Investors must hedge against unexpected "tail risks," such as: the end of the Hong Kong currency peg, "America First" policies leading to the collapse of the euro or the EU turning eastward, Trump tariffs causing a sharp contraction in the U.S. economy, a second wave of inflation forcing the Federal Reserve to raise interest rates, a new pro-inflation Federal Reserve chair in 2026 leading to dollar depreciation, and typical Wall Street bubbles in the field of artificial intelligence.

We believe that the bubble in AI/the seven tech giants is the most obvious "tail risk," as many investors expect that the $7 trillion money market fund will eventually flow into the U.S. stock market (if tighter financial conditions in the first quarter fail to curb investor animal spirits, it will really be like 1999). We believe that going long on cryptocurrencies and Chinese stocks (undervalued/tech-related) is the best choice within the bubble of the seven tech giants.