Story
Stock Market Resilience Signals Confidence in Central Banks, BofA Says
Summary
Bank of America strategists note that the stock market's muted reaction to rising yields and a stronger dollar suggests investors believe central banks can successfully restore policy credibility amid a global tightening cycle.
The stock market's relatively stable performance in the face of a new global monetary tightening cycle is a vote of confidence in central banks' ability to restore their policy credibility, according to strategists at Bank of America led by Michael Hartnett.
A Muted Market Reaction
In a recent note, BofA strategists highlighted that since Federal Reserve official Kevin Warsh's hawkish turn at Jackson Hole, the 10-year Treasury yield has climbed 60 basis points and the U.S. dollar has gained 2%. Despite these headwinds, equities have only dipped by a modest 1%.
This resilience, along with the fact that the "Magnificent Seven" tech stocks broke out to new highs following the Federal Reserve's latest rate hike, suggests markets believe the effort to rein in inflation will succeed. Central banks globally have enacted 60 rate hikes this year, a significant increase from just 20 in 2025, marking what BofA calls a "genuine regime shift" away from years of easy money.
Elevated Risks and Year-End Scenarios
However, the strategists warned of elevated risks, particularly in the bond market. A recent 35% two-day jump in the MOVE Index, a key measure of Treasury market volatility, keeps the risk of a "sudden deleveraging event" high.
AdHartnett outlined three potential scenarios for markets heading into year-end. The base case, termed "Debasement and Duration," posits that while a policy-driven surge in yields is the most likely trigger to end the current boom, the administration will intervene to cap yields and oil prices. Under this scenario, BofA favors staying long commodities and emerging market assets.
Weekly Flows Show Rotation to Safety
Despite the market's overall resilience, weekly fund flow data showed a clear rotation toward safer assets. For the week, investors pulled $10.2 billion from stocks while allocating funds to:
- Bonds: $17.3 billion in inflows
- Cash: $11.6 billion in inflows
- Gold: $2.3 billion in inflows
U.S. equities experienced their largest weekly outflow since March, totaling $21.1 billion. Despite this short-term caution, global equities remain on track for a record $1.2 trillion inflow in 2026, far surpassing the previous record of $949 billion set in 2021.
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