Bank of America Hartnett: U.S. stocks "sell the fact," "short the dollar" before the Federal Reserve cuts interest rates, and "go long on 5-year U.S. Treasuries" before the Republican budget

As trade negotiations continue to make progress, is the rebound of the US stock market assured? Bank of America strategist Michael Hartnett does not think so.

Hartnett, known as the "most accurate analyst on Wall Street," proposed three key trading strategies in his latest research report: Expect the market to "buy the expectation, sell the fact" after the trade agreement is announced, maintain a short position on the dollar until the Federal Reserve is forced to cut interest rates, and continue to go long on 5-year US Treasuries until the Republican budget reconciliation officially confirms future tax cuts/extensions.

Hartnett believes that the macro factors driving the market higher are most likely to come from the "three Cs": the China deal, global rate cuts, and strong consumer demand.

Conversely, the biggest bear market risk comes from the deleveraging contagion effect of asset prices, especially in the case where the combination of Trump and Powell leads to "uncontrolled long-term interest rates."

In other words, if the market is no longer willing to buy long-term Treasuries, leading to a surge in interest rates, it could trigger stress in the debt chain. As shown in the chart below, the total global debt reached a record high of $324 trillion in the first quarter of this year. In this context, a collective "buy boycott" by bond investors is only a matter of time.

Stock Market May Decline After Trade Agreement

Hartnett's investment outlook for 2025 has been widely validated, with core predictions including: bonds outperforming stocks, international stocks outperforming US stocks, and gold outperforming the dollar.

This view is based on the conflict between the excessive positioning of American exceptionalism and the new populist policies, which include higher tariffs, smaller government, low immigration, and reduced wars, all of which will slow the "abnormally" rapid pace of 50% nominal GDP growth in the US over the past five years and reverse the biggest investment trends of the 2020s, such as "ABB" (anything but bonds), artificial intelligence, etc.

Hartnett pointed out that key trigger factors for policy risk in 2025 include: the Federal Reserve has stopped cutting interest rates, US government spending growth has stagnated (US government spending increased by $827 billion to $7.1 trillion over the past year, but is projected to decrease by $50 billion according to the FY2026 budget proposal), and even if the effective tariff rate in the US drops from 28% to 15%, it still represents an increase of over $600 billion in tariff revenue.

Tactically, Hartnett stated that while oversold stocks have correctly anticipated the expectation of a trade agreement/lower tariffs in the second quarter, he expects the market to "buy the expectation, sell the fact," and believes that stocks will decline after the trade agreement is announced.

At the same time, Hartnett recommends maintaining a short position on the dollar until the Federal Reserve is forced to cut interest rates; and going long on 5-year US Treasuries until the Republican budget reconciliation officially confirms future tax cuts/extensionsHartnett believes that the macro factors of "3C" — China deal, rate cuts, and strong consumers — remain the most likely catalysts for further bull market runs.

In contrast, Hartnett sees the "asset price" risks stemming from the spread of deleveraging as bear market risks, especially in scenarios where Trump/Powell may lose control over long-term interest rates.

Structural Shift: From 60/40 Stock-Bond Allocation to Cash/Gold/Stocks/Bonds

From a broader perspective of investment and business cycles in the medium to long term, Hartnett believes that bonds are in the early stages of a structural bear market that began in 2020; commodities are in the early stages of a structural bull market, led by gold; and U.S. stocks are in the late stages of a structural bear market relative to international stocks (which are currently in a relative structural bull market).

He believes that this asset rotation is the result of the "macro upheaval" of the 2020s:

The 2020s are witnessing the end of excessive monetary and fiscal expansion, the reversal of globalization, populist pressures to restrict immigration, and threats to central bank independence. The situation where capital has outperformed labor from 2000 to 2020 is also under pressure from a new trading system, a new global financial architecture, polarized politics, and nationalist geopolitics.

Hartnett made a historical comparison of stocks from the perspective of gold, pointing out that the significant decline of U.S. stocks relative to gold has occurred during times of macro order upheaval:

During the 1930s Smoot-Hawley Act and the Great Depression, the 1970s stagflation, oil shocks, and the end of the Bretton Woods system, as well as the 2000s post-9/11, China's accession to the WTO, and the rise of BRICS.

Currently, the performance of U.S. stocks relative to gold has fallen to a new low since 2020, indicating that we are in the "fourth major structural shift."

Although the overall environment is relatively cold, Hartnett remains optimistic about artificial intelligence. He believes that AI will continue to be transformative and remains the only secular trend supporting price-to-earnings ratios through increased productivity, which comes at a crucial time as U.S. labor productivity fell by 0.8% in the first quarter, with the productivity trend in the fourth quarter being the weakest since 2023.

However, he also points out that the "capital expenditure + labor substitution" brought about by AI may have two risk paths:

Productivity increases but no unemployment → Profit margins are compressed, and the Federal Reserve is pressured to cut rates;

Productivity increases and triggers unemployment → Political pressures arise for taxing the wealthy and protecting workersOverall, Hartnett believes that the most diversified portfolio, such as a 25/25/25/25 allocation of cash/gold/stocks/bonds, may outperform the traditional 60/40 stock-bond allocation.