Bank of America Hartnett: U.S. stocks are close to a "sell signal," but the risk of a bubble in the second half of the year is high, and gold remains the best hedge against a weak dollar

Bank of America Chief Investment Strategist Michael Hartnett stated in the latest research report on the 26th that U.S. stocks are approaching a technical "sell signal," but potential changes in the policy environment may create a stock market bubble in the second half of the year.

According to the news from the Wind Trading Desk, multiple technical indicators from Bank of America show that the global capital flow trading rules are nearing the "greed" threshold. In the past four weeks, the proportion of funds flowing into global stocks and high-yield bonds relative to assets under management has reached 0.99%, close to the 1.0% warning line. At the same time, the global breadth rule indicates that 73% of the MSCI Global Country Index is trading above its moving averages. If the S&P 500 index breaks through 6300 points in July, it is likely to trigger a sell signal.

Despite the cautious signals from technical indicators, the policy environment provides support for the second half of the year. Central banks around the world have cut interest rates a total of 64 times this year, and the Federal Reserve may join the rate-cutting ranks in response to slowing economic growth. Trump is expected to nominate a new Federal Reserve chairman in early autumn, historical data shows that such nominations typically lead to a decline in the dollar.

Hartnett advises investors to stick to the "BIG" strategy—bonds, international stocks, and gold—and believes that gold remains the best hedge against a weakening dollar. The strategist points out that although trading rules are close to a sell signal, if policies shift from tariffs to tax cuts and interest rate reductions, the risk of a bubble in the second half of the year is high.

U.S. Stock Technical Indicators Near Sell Threshold, Market Participation at Historic Low

Multiple technical indicators from Bank of America show that U.S. stocks are approaching a critical threshold. In the global breadth rule, currently, 73% of the MSCI Global Country Index is trading above the 50-day and 200-day moving averages, with the critical point at 88%. If the S&P 500 index breaks through 6300 points in July, it is likely to trigger a "sell signal."

The global capital flow trading rules also emit cautious signals. In the past four weeks, the proportion of funds flowing into global stocks and high-yield bonds relative to assets under management is exactly 0.99%, nearing the 1.0% "greed" threshold.

Bank of America's bull-bear indicator has risen from 5.5 to 5.8, the highest level since November last year. This indicator is mainly driven by strong global stock index breadth and increased inflows into risk assets, but hedge funds are increasing protective positions in the S&P 500.

Despite the S&P 500 index reaching new highs and being on the verge of a significant breakthrough for the seventh time since 1990, the number of stocks participating in the breakthrough is historically low. Currently, only 22 S&P 500 constituent stocks are at historical highs, far below previous breakthroughs: 51 in 1991, 66 in 1998, 82 in 2007, and 97 in 2013.

This narrow leading pattern indicates that the market's rise is mainly driven by a few stocks. In Bank of America’s private client portfolio, "Mag7" stocks account for 14.8% of the assets under management in common stocks and ETFs, showing a high concentration in large tech stocks.

Policy Environment Provides Support for the Second Half of the Year

Despite facing sell signals from technical indicators, the potential improvement in the policy environment provides support for the second half of the year. Global central banks have cut interest rates a total of 64 times this year, and 2025 is expected to be the year with the largest global rate cuts since 2009. The Federal Reserve may join the rate-cutting ranks to address the slowdown in U.S. economic growth in the first half of the year.

In terms of trade policy, the effective tariff rate in the U.S. is expected to bottom out at 10%, a significant increase from 2% in 2024, equivalent to a global tax of $400 billion on foreign exporters, domestic importers, and U.S. consumers. However, the market does not expect additional reciprocal tariffs to be implemented on July 9.

On the fiscal side, the "Beautiful Big Plan" is set to reduce taxes by $90 billion annually starting in 2026, while government spending is expected to decrease by $50 billion in 2026.

Capital Flows Show Divergence

The latest weekly capital flows show a clear divergence: $26 billion flowed into cash, $12.1 billion into bonds, $3.5 billion into stocks, $2.8 billion into gold, and $2.1 billion into cryptocurrencies.

Emerging market bonds recorded a historic inflow of $5.8 billion in a single week, while U.S. small-cap stocks faced an outflow of $4.4 billion, the largest since December 2024. In the first half of this year, U.S. stocks received an inflow of $164 billion, expected to be the third-largest annual inflow in history; large-cap stocks received $224 billion, likely setting a record for annual inflows in 2025.

Federal Reserve Chair Nomination May Trigger Bond Market Turmoil

Historical data shows that nominations for the Federal Reserve Chair typically impact the bond market. Among the seven nominations since 1970 (Burns, Miller, Volcker, Greenspan, Bernanke, Yellen, Powell), the 2-year U.S. Treasury yield has averaged an increase of 65 basis points, the 10-year yield an increase of 49 basis points, the dollar has averaged a decline of 2%, and the S&P 500 has had mixed performance within three months of the nomination.

Trump is expected to nominate a new Federal Reserve Chair in early fall, which could become an important catalyst for the bond market. Bank of America states that the only risk for bond investors may come from the formation of a stock market bubble.

Bank of America Suggests: Stick to the "BIG" Strategy

Hartnett advises investors to stick to the "BIG" strategy (Bonds, International Stocks, Gold). Specifically, with the U.S. macroeconomic slowdown and the Federal Reserve expected to cut interest rates, yields are likely to decline, making U.S. Treasuries attractive; the exceptional performance advantage of U.S. stocks relative to international stocks has ended; gold remains the best hedge against the upcoming U.S. dollar bear market.

Based on the performance, sentiment, and capital flows in the first half of the year, the contrarian trading suggestions for the second half include: going long on the U.S. dollar, going long on oil while shorting gold, going long on U.S. consumer discretionary stocks while shorting European bank stocks, going long on airline stocks while shorting defense stocks, etc.

Hartnett points out that although trading rules are approaching sell signals, bubbles tend to ignore trading rules. If non-farm payroll data does not fall below 100,000 or long-term bond yields do not break above 5%, the risk of a bubble in the second half of the year is high, as Trump and Powell may shift from tariffs to tax cuts/interest rate cuts to stimulate U.S. dollar depreciation and the U.S. stock market bubble as a remedy to reduce the burden of U.S. debt through prosperity