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Bank of America Corp. strategists said investors should sell into rallies in U.S. stocks and the dollar, cautioning that the conditions for sustained gains are missing.
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The dollar is in the midst of a longer term depreciation while the shift away from U.S. assets has further to go, according to the team led by Michael Hartnett. The trend would continue until the U.S. Federal Reserve starts cutting interest rates, the U.S. reaches a trade deal with China and consumer spending stays resilient.
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“Current ‘pain trade’ unquestionably is a narrow, Magnificent 7-led, squeeze higher in U.S. stocks and U.S. dollar,” the strategists wrote in a note. A decisive break from current key support and resistance levels — estimated at 5,690 for the S&P 500, near the 50-week moving average — would depend on these conditions being met, they said.
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U.S. assets have suffered this year after reaching extreme valuations in 2024, as investors trimmed exposure in the wake of aggressive trade policies. The tariffs are threatening global growth and will likely fuel U.S. inflation, prompting asset allocators to diversify their exposure.
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The S&P 500 has plunged as much as 19 per cent from its February peak before recovering nearly half of that drop as dip-buyers stepped in. Bloomberg’s dollar index has fallen 6.3 per cent this year.
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The depreciation of the dollar is the “cleanest investment theme to play,” according to Hartnett. He sees DeepSeek as the peak in U.S. exceptionalism, Trump policies as the trigger for European fiscal excess and his tariff announcements as the beginning in the decline of globalization.
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“Weaker U.S. dollar will play out either slowly with lower yields or quickly with higher yields,” Hartnett said. “It’s brutally flagged by the soaring gold price.”
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The weak dollar theme favors increased global asset allocation to commodities, emerging markets and international stocks, such as Chinese technology as well as European and Japanese banks, he added.
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