Bank of America Hartnett: The weak dollar cycle has begun, and the era of "buy everything except the dollar" has arrived

Bank of America strategist Michael Hartnett released a latest research report indicating that 2025 will be a significant watershed for global market investment themes. He expects that the trading logic of "Anything But Bonds" (ABB) that has dominated the market in recent years will come to an end, to be replaced by a new paradigm of "Anything But The Dollar" (ABD).

The market is closely watching the Federal Reserve's interest rate meeting next week, with widespread expectations of at least a 25 basis point rate cut. Hartnett points out that the current market reaction shows that investors believe this rate cut by the Federal Reserve has "credibility," as it is an action taken against the backdrop of a re-acceleration of U.S. economic growth. This expectation has driven a rebound in risk parity strategies, breaking through the highs of 2024.

So far this year, the performance of major assets has shown significant divergence. Gold leads with a rise of up to 38%, far exceeding the performance of global stocks (25%) and Bitcoin (23%). In contrast, the dollar and oil have become the biggest losers, down 10% and 13% respectively since the beginning of the year. This performance difference supports Hartnett's judgment on the weakness of the dollar.

Hartnett cites a mainstream market view:

"The Federal Reserve is cutting rates at market highs... I will continue to go long on stocks until we start worrying about the (U.S.) midterm elections next spring."

Goodbye to the era of "Anything But Bonds"

Hartnett believes that the core logic supporting the reversal of "ABB" trading is that U.S. nominal GDP growth is about to peak. Since 2020, U.S. nominal GDP has grown an astonishing 54%, marking the strongest increase since World War II. However, he predicts that this growth momentum will peak in 2025, with the annual growth rate slowing from 6% to 4% due to weakening government spending and labor market conditions.

A peak in nominal growth typically also means a peak in bond yields. Therefore, Hartnett judges that the brutal bear market in the bond market that has lasted for years will come to an end in 2025 With the cyclical end of the "ABB" trade, those long-neglected, interest-sensitive assets, such as small-cap stocks and value stocks, will welcome favorable conditions. Data shows that the rolling return rate of small-cap stocks relative to large-cap stocks is nearing a 100-year low, suggesting significant room for recovery.

Embrace "ABD" and International Markets

With the conclusion of the "ABB" trade, Hartnett has proposed a new theme for 2025: "ABD" (Anything But The Dollar). He believes that the weakening of the dollar, the end of the deflation era in Europe and Japan, and the fiscal expansion in Europe, the U.S., and Asia all provide reasons to go long on non-dollar assets. This strategist clearly states that one should "go long on international markets."

In this context, the strategic value of gold is increasingly highlighted. Hartnett states that gold is a tool to hedge against "anarchy and the risk of dollar depreciation." Although a significant inflow of funds recently (recording the fourth-largest weekly inflow in history) indicates that the gold bull market has shifted from "quiet" to "noisy," he expects gold prices to rise further. Additionally, he suggests that investors hedge and balance their risk exposure in the U.S. AI bubble by allocating to Chinese tech stocks.

AI Bubble and the "Blind Spot" in the Credit Market

Although AI remains the brightest highlight in the foreseeable future of the market, it also hides risks. Hartnett points out that capital expenditures funding the AI bubble are rapidly expanding. The proportion of capital expenditures for hyperscale data centers relative to their cash flow has surged from 35% in 2023 to 72%.

This means that the increasing capital expenditures will increasingly rely on debt (especially private credit) for financing. However, an unusual phenomenon is that the credit spread in the tech sector is nearing its narrowest level since 1997. Hartnett analyzes that this indicates credit investors are currently not worried about the "burning cash" risks in the AI industry, and the market seems to have entered a state of "willful blindness" to risks.

Triple Game: Policy, Earnings, and Politics

Hartnett uses his classic "PPP" (Policy, Earnings, Politics) framework to analyze the current situation.

• Policy: The market generally believes that the Federal Reserve's interest rate cuts are "preemptive," which has driven the narrowing of credit spreads and the rise of interest-sensitive stocks such as banks and small-cap stocks. However, Hartnett also provides warning signals: if credit spreads (such as the IG CDX index above 60 basis points), bank stocks (such as the BKX index falling below 140 points), and small-cap stocks (such as the RTY index failing to break through 2400 points) reverse, it may indicate that the Federal Reserve is actually "behind the curve." The economy will further slow down.
• Profits: A weak labor market (with an average of only 64,000 new jobs added per month over the past 6 months, the weakest since 2020) is being offset by a strong "K-shaped" wealth effect. According to estimates from Bank of America Private Client data, following an increase of $900 billion in 2024 and an additional $300 billion in the first half of 2025, U.S. households' equity wealth increased by another $300 billion in the third quarter of 2025.
• Politics: Populism is on the rise, but populists lack patience. For the U.S., high inflation, high unemployment (with the youth unemployment rate rising from 4.8% in April 2023 to 9.4%) and a huge wealth gap pose social risks. This leads Hartnett to continue referencing the "Nixon Reprise" scenario of the early 1970s—reducing unemployment through "prosperity" policies while curbing inflation with price controls. This policy combination will make it difficult for the dollar to gain support from the "American exceptionalism" narrative and will continue to push up the prices of gold and cryptocurrencies.

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