Michael Hartnett, chief investment strategist at Bank of America, said euphoria in the stock market following the Federal Reserve's rate cuts is fueling bubble risks, making bonds and gold attractive hedges against any recession or resurgence of inflation.

The strategist, who was largely bearish on stocks last year, has previously said he is more bullish on bonds for 2024. He said U.S. stocks are now pricing in further easing from the Federal Reserve and earnings growth of about 18% for the S&P 500 by the end of 2025.

“There is no better combination for risk assets, so investors are forced to chase the rebound,” Hartnett wrote in a note. Still, he warned that bubble risks are returning and recommended buying the dips in bonds and gold.

The strategist also said investing in stocks and commodities outside the U.S. is a good way to trade themes around a “soft landing” for the economy, the latter as an inflation hedge. That’s because, Hartnett believes, international stocks are cheaper and are beginning to outperform their U.S. counterparts.

Global stocks rose on Thursday on optimism that the Federal Reserve's 50 basis point rate cut had kicked off an easing cycle in time to prevent a U.S. recession. The S&P 500 and Dow Jones Industrial Average hit record highs. The tech-heavy Nasdaq 100 also surged 2.6%, its best day in more than a month.

S&P 500 rises to record high after Fed cuts rates

However, markets started cautiously on Friday, with all three major U.S. stock indices opening slightly lower and the European benchmark down 0.7%.

A Bank of America survey earlier this month found investor sentiment improving amid bets on resilient economic growth. Still, a U.S. recession and accelerating inflation are still ranked by the market as the biggest tail risks.

Hartnett has previously warned that tech stocks could be in a bubble amid the frenzy surrounding artificial intelligence.

Article forwarded from: Jinshi Data