Bank of America’s chief investment strategist, Michael Hartnett, cautions that the recent equity market rally is unlikely to be sustained, even amid renewed optimism around U.S. trade agreements.
Despite this week’s announcement of a new deal, Hartnett argues that investors may be overestimating the upside potential tied to easing trade tensions.
In his latest client note, Hartnett writes that the sharp rebound in equities since the April sell-off is being driven more by anticipation than by fundamentals. The S&P 500 has gained nearly 14% from its recent lows, buoyed by investor expectations for lower tariffs and additional trade resolutions. However, Hartnett views the rally as a classic case of “buy the rumor, sell the news.”
“We expect ‘buy the expectation, sell the fact,’” Hartnett and his team wrote, signaling their belief that the market will struggle to maintain momentum even as more trade deals are announced. He suggests that current valuations already reflect a best-case outcome on the trade front, leaving little room for further upside.
This perspective stands in contrast to several other firms that remain bullish on the potential market impact of de-escalating trade tensions. Deutsche Bank, for example, recently projected that a notable reduction in tariffs could push the S&P 500 to 6,150 by year-end. Morgan Stanley has similarly pointed to the prospect of a U.S.-China agreement as a key catalyst that could fuel another leg higher for the equity market.
But Hartnett remains unconvinced. His team sees diminishing returns from further trade breakthroughs and recommends that investors temper their expectations. He continues to favor international equities over U.S. stocks, noting that relative valuations remain more attractive abroad. Additionally, Hartnett sees opportunity in fixed income and commodities, specifically five-year Treasury notes and gold, which he views as better-positioned for the current late-cycle environment.
A central pillar of Hartnett’s caution is his belief that investors are over-leveraged to the narrative of U.S. exceptionalism.
“The America-first trade is clashing with new populist policies of higher tariffs, smaller government, lower immigration, fewer wars,” Hartnett wrote, adding that these structural changes may impair U.S. growth prospects longer term. In his view, a shift in political and fiscal priorities is emerging that will likely result in slower growth and lower equity returns for U.S. investors.
This isn’t the first time Hartnett has flagged downside risks tied to over-exuberance in U.S. markets. In November, he issued a similar warning that the multi-year stretch of U.S. outperformance was nearing its end. His conviction has only strengthened in recent months, particularly as equity markets have priced in substantial optimism despite only incremental progress on trade and policy fronts.
For advisors evaluating asset allocation heading into the second half of 2025, Hartnett’s view serves as a reminder to look beyond headline-driven optimism. While the resolution of trade disputes may offer tactical opportunities, Hartnett believes structural factors—including changes in global monetary policy, fiscal direction, and geopolitical shifts—are more likely to drive performance over the medium term.
In this context, Hartnett advises clients to maintain positions in five-year Treasurys, citing their defensive characteristics and ability to perform in a range of scenarios, including delayed tax policy updates or interest rate cuts. He also continues to advocate for exposure to gold as a hedge against political volatility and potential central bank missteps.
While other strategists see trade progress as a green light for risk-on positioning, Hartnett argues that markets have already priced in much of the good news. “When expectations run ahead of policy outcomes, disappointment often follows,” he notes.
For wealth advisors and portfolio managers, the implication is clear: tread carefully in chasing equity rallies driven by trade headlines. Instead, Hartnett suggests a more measured approach, favoring diversified global exposure, tactical fixed income positioning, and selective use of real assets like gold.
As always, keeping client portfolios aligned with longer-term objectives rather than reacting to near-term market euphoria will be key. While markets may continue to respond to the ebb and flow of trade negotiations, Hartnett warns that the fundamental drivers of sustainable performance lie elsewhere—and that the time to shift positioning may be now, before optimism gives way to reality.
