Even after a powerful rebound after the early-April tariff-driven selloff, Bank of America’s chief investment strategist Michael Harnett says the case for a lasting bull market still depends on a rare trio of conditions that remains out of reach for now.
In his regular “The Flow Show” report, titled “Stay BIG, sell rips” and shared Friday, the renowned contrarian strategist said he remains a buyer of dips in bonds, international stocks and gold — forming the acronym BIG — while selling into rallies in U.S. stocks and the dollar.
“If no recession, equity lows are in, simple; but can’t jump back on bull unless Treasury yields falling below 4%, and earnings growth stays above 5%” Hartnett said.
Are Stocks Still Oversold?
Despite the recent rebound, the SPDR S&P 500 ETF Trust SPY remains 12% below its all-time highs reached in February.
Market internals tell a grimmer story: Harnett said that 304 stocks in the S&P 500 and 58 in the Nasdaq 100 are still trading below their 2021-22 highs.
This broad-based weakness highlights what Harnett described as a “remarkable flip from ‘U.S. exceptionalism’ hubris to ‘U.S. repudiation.’”
Technically, only one-third of stocks in the S&P 500 and Nasdaq 100 are trading above their 200-day moving averages, suggesting the damage from the April selloff runs deep across sectors.
Three Catalysts Needed For A Sustainable Rally
For a sustained bull market to materialize, Harnett identified three essential conditions: lower Treasury yields driven by Fed cuts, a meaningful reduction in U.S.-China tariffs, and a robust American consumer.
On monetary policy, the strategist pointed to shifting expectations around rate cuts. Market-implied probabilities show just an 8% chance of a cut at the May 7 Federal Open Market Committee meeting, rising to 65% by June 18 and reaching 100% by July 30.
Regarding trade, Harnett said a minimum requirement would be a U.S.-China peace deal that slashes current tariffs—now standing at 145%—to levels well below the 60% range promised during Donald Trump‘s election campaign.
On the consumer side, Harnett cited immigration data showing Southwest border encounters falling to 11,000 per month in February and March from an average of over 100,000 per month in 2024, and a peak of 300,000 in December 2023. This decline could bolster a tight labor market, supporting consumer spending.
Yet headwinds remain strong. U.S. household equity wealth is down $6 trillion year-to-date, Bank of America data show, putting pressure on the top 10% of earners who account for 50% of U.S. consumer spending—the highest concentration since 1989.
Harnett highlighted that the relative performance of Ferrari N.V. RACE compared to Dollar General Corp. DG is at its lowest in nine months. This signals a broader trend of investors rotating away from luxury and discretionary sectors toward more necessity-driven, defensive stocks.
Inflation expectations, meanwhile, have surged to levels not seen since 1981, threatening to lift household savings rates and curb spending.
A New Era For Stock Valuations?
Zooming out, Harnett said 2025 could mark a pivotal turning point for stock valuation. After years of ultra-low rates, massive fiscal stimulus, and booming asset prices, a “new world order” on valuations may now emerge.
Historically, the average price-to-earnings ratio (P/E) for the S&P 500 was 14x in the 20th century and 20x in the 21st century. In recent years, 20x acted as a floor thanks to globalization, technology advances and the AI boom.
“In December 2024, $18tn market cap of Magnificent 7 was almost on par with $20tn GDP of G7 economies ex-USA,” Hartnett said.
Going forward, Harnett said 20x could become the ceiling for valuations, citing the reversal of globalization, diminished Fed independence, and a new inflation normal of 3%-4% outside of recessions.
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