BofA’s Hartnett Sees Investors Avoiding Risk on Fed, Midterms

(Bloomberg) -- Risk aversion is set to dominate markets in coming weeks as investors seek shelter from higher interest rates and volatility around US midterm elections and the AI trade, according to Bank of America Corp.'s Michael Hartnett.

A summer of "extreme bull sentiment" has come to an end, while the broad selloff in global bonds has driven yields adjusted for inflation to 3%, the strategist said in a note. Higher energy prices and sticky inflation are also adding to investors' list of worries.

"We continue to lean risk-off next 3-4 weeks given 3% real yields," Hartnett wrote. He said his team expects an October rate hike by the Federal Reserve "to restore credibility" after inflation ran above the central bank's target for more than five years. He also sees rising chances of a "wave-like" Democratic sweep in the November midterms.

The BofA strategist's call for a rate hike, published in a note on Oct. 15, is more hawkish than broad market pricing. Swaps traders pared bets on an increase on Friday after Fed Chair Kevin Warsh did nothing to dispel market expectations that the central bank will hold interest rates steady when it meets at the end of the month.

Investors have become increasingly concerned about whether the massive investment in AI infrastructure, and the borrowing to fund it, will be justified. Bets on the AI trade have powered the rally in US stocks, with technology funds attracting record annualized inflows of $196 billion in 2026, the BofA team said, citing figures from EPFR Global.

Hartnett said his team favored adding exposure to "peak yield" beneficiaries in small caps, real estate investment trusts and the consumer discretionary sector. "We don't add tech."

With assistance from Jan-Patrick Barnert.