BofA’s Hartnett Sees Risk-Off Mood Lasting Until Mid-November

(Bloomberg) -- Investors' risk-off mood is likely to continue well into November, according to Bank of America Corp.'s Michael Hartnett, in another sign of how jitters around the artificial intelligence trade and the US midterm elections have held back equity markets.

"We stay tactically risk-off until mid-Nov," the strategist wrote in a note to clients Friday. "Expect down-in-yields, down-in-stocks, down-in US dollar trade."

Hartnett said the market still needs to fully price a Democratic victory in both the House of Representatives and the Senate, which would be negative for earnings growth as it would result in an end to the current low-tax, low-regulation regime.

Another factor that would signal a revival of risk appetites would be the European Central Bank or French government stepping in to reverse the rout in French bond yields, Hartnett said. A peak in AI hyperscaler debt spreads, which have spooked markets recently, could also be brought about by cuts to capital spending or an "extreme equity issuance announcement," he said.

Investors are continuing to pile into the AI-related sectors. EPFR Global data cited by the bank showed the largest weekly inflows into technology stocks since July. A Bank of America survey this month also showed that global investors are the most exposed to tech since August 2020.

In recent days, though, they've also taken a defensive turn, looking for shelter from a series of risks ranging from climbing oil prices and higher borrowing costs as well as worries that the AI trade is starting to exhibit bubble-like conditions.

Billionaire Ken Griffin warned this week that investors are "almost certainly" in the midst of an AI bubble. An equal-weighted version of the S&P 500 Index — a proxy for market breadth — on Thursday had its best day since 2024 relative to the market-cap weighted S&P 500. Defensive consumer staple stocks, meanwhile, are on track for their best month since 1998.