The latest shift in US economic policy, emphasizing tax reductions and lower tariffs, may ignite speculative fervor in financial markets, according to strategists at Bank of America Corp.
Bank of America’s Michael Hartnett and his team suggest this strategic pivot could encourage traders to abandon bonds in favor of high-risk, high-reward sectors like artificial intelligence (AI) and cryptocurrencies. Such movements, they warn, could inflate a new market bubble. Despite this potential scenario, Hartnett maintains that the optimal portfolio for 2025 leans toward bonds, international equities, and gold. However, he cautions that a sweeping bullish sentiment presents the most significant threat to his forecast.
US equities and Bitcoin have seen remarkable recoveries from the steep April downturn, spurred by President Donald Trump’s retreat from aggressive tariff policies. Additionally, Trump’s calls for the Federal Reserve to lower interest rates aim to accelerate economic growth, adding fuel to market optimism.
Bank of America’s strategists highlight a historical trend during market euphoria: the traditional inverse relationship between bonds and equities often reverses. In 12 of the past 14 major market bubbles, bond yields climbed as equities soared. “Few signals are as indicative of a bubble as rising nominal and real yields driven by equities,” the team emphasized.
Earlier this month, the 30-year Treasury yield surpassed 5%, driven by Moody’s downgrade of US debt and concerns over escalating government borrowing. These developments have sparked debates about the durability of the US’s reputation as the world’s financial safe haven. Concurrently, the Nasdaq 100 surged nearly 10% in May, positioning it for its strongest monthly performance since 2023.
On Friday, US stock futures wavered as traders grappled with lingering ambiguity surrounding tariff policy. Early trading saw S&P 500 contracts dip by 0.1%, reflecting market sensitivity to policy signals.
Drawing on past asset bubbles, Bank of America’s analysis projects a potential 30% gain for the so-called Magnificent Seven stocks before reaching their peak. The strategists recommend a barbell investment approach, balancing allocations between the Magnificent Seven and global value stocks as a prudent strategy to hedge against bubble risks.
Key Takeaways from the Report
Record Equity Outflows
Investors withdrew $9.5 billion from global equities over the past week, marking the largest outflow of 2025, according to data from EPFR. This trend underscores mounting investor caution amid volatile conditions.
Inflows into Alternative Assets
As the dollar weakens, assets like gold, cryptocurrencies, and emerging-market debt and equities have attracted significant inflows. This indicates a strategic pivot among investors seeking diversification and inflation hedges.
Treasuries Offer Competitive Yields
With 30-year Treasury yields at 5%, Bank of America argues that these instruments are currently a more compelling option compared to the S&P 500. The stable returns from Treasuries provide an attractive alternative amidst equity market uncertainty.
Earnings and Economic Growth Expectations
The report notes that a higher allocation to US equities necessitates clear evidence of robust global growth. Specifically, they estimate the S&P 500’s earnings per share must exceed $300, driven by accelerated productivity gains and employment shifts enabled by AI innovations.
Implications for Advisors
The evolving economic backdrop offers wealth advisors and RIAs both opportunities and risks as they navigate client portfolios. Here are strategic considerations:
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Reassess Risk Profiles
The potential for speculative bubbles in AI and cryptocurrency sectors underscores the importance of revisiting client risk tolerance. These high-volatility areas could generate outsized returns but come with substantial downside risks. -
Diversification Remains Key
Amid growing enthusiasm for US equities, advisors should balance portfolios with international stocks, bonds, and tangible assets like gold. Such diversification can provide a cushion against potential market turbulence. -
Monitor Fixed Income Opportunities
With Treasury yields reaching compelling levels, advisors should evaluate the role of long-term government bonds as a stabilizing force within client portfolios. -
Focus on Value and Growth Dynamics
The barbell strategy—blending high-growth Magnificent Seven stocks with undervalued global equities—offers a dual approach to capturing market upside while mitigating risks. -
Prepare for AI-Driven Shifts
As AI continues to influence productivity and labor markets, advisors should identify sectors poised to benefit most from these transformative trends. Integrating thematic exposure to AI and related technologies could align portfolios with long-term growth narratives.
Conclusion
The Trump administration’s pro-growth measures have revitalized markets but also heightened the risk of speculative bubbles. Bank of America’s insights offer a roadmap for navigating this complex environment. By emphasizing diversification, value-driven strategies, and readiness to capitalize on emerging trends like AI, wealth advisors and RIAs can position their clients for success in a dynamic economic landscape.
