Bank of America (BofA) is advising investors to maintain a defensive approach to financial markets over the next three to four weeks, warning that rising real yields, geopolitical tensions, and volatility in artificial intelligence stocks could increase stock market risks.
Strategists led by Michael Hartnett highlighted several threats to investor confidence, including real yields approaching 3%, uncertainty surrounding the US midterm elections, and mounting pressure on AI-related companies.
The investment bank also emphasized the importance of upcoming Federal Reserve decisions, suggesting that monetary policy could play a decisive role in determining the direction of equities and bonds.
BofA Warns of Rising Stock Market Risks
Bank of America’s strategy team continues to favor a risk-off investment stance as several economic and political developments threaten market stability.
Among the major concerns are elevated US Treasury real yields, geopolitical tensions involving the United States, Iran, Russia, and Ukraine, and uncertainty ahead of the midterm elections.
The strategists also identified the possibility of substantial Democratic gains in Congress as another factor that could influence market sentiment.
Meanwhile, weakness in artificial intelligence-related stocks has raised questions about the sustainability of the technology sector’s recent investment boom.
Companies financing large AI infrastructure projects are facing increased scrutiny, particularly as borrowing costs remain elevated.
Private equity and business development company exchange-traded funds (ETFs) have returned to their 2026 lows, reflecting growing concerns about credit conditions.
Bank of America also identified Oracle’s credit default swaps as an important indicator of potential financial stress linked to AI infrastructure financing.
BofA Bull & Bear Indicator Signals Changing Market Conditions
Bank of America’s closely watched Bull & Bear Indicator declined sharply to 7.4 from 8.1.
The drop ended a previous sell signal that had been triggered on May 26.
Since that signal, financial markets have delivered mixed performances.
The S&P 500 gained approximately 3%, while the Nasdaq 100 declined 0.2%. Meanwhile, high-yield bonds recorded a considerably larger loss of 4.1%.
These contrasting results highlight the uneven performance of risk assets and the growing divergence between equity and credit markets.
Although the indicator’s decline removes the earlier sell signal, BofA’s strategists continue to recommend caution in the near term.
Federal Reserve Rate Hike Could Restore Market Confidence
Hartnett and his team believe the Federal Reserve should increase interest rates at its October 28 meeting to reinforce its commitment to controlling inflation.
The strategists noted that US consumer inflation has remained above the Fed’s 2% target for 66 consecutive months.
According to their analysis, an additional rate hike could strengthen confidence in the central bank’s inflation-fighting credibility.
BofA expects such a move could help reduce longer-term Treasury yields by approximately 20 basis points over the following weeks.
Lower long-term yields could provide some support for risk assets by easing financial conditions and reducing valuation pressures.
However, this scenario depends on several important developments.
Concerns surrounding AI financing would need to ease, while renewed trade or political tensions between the United States and China could undermine market confidence.
Investors are also monitoring potential diplomatic developments involving President Donald Trump and Chinese President Xi Jinping, including meetings associated with the November 18 APEC summit in Shenzhen and December 14 G20 summit in Miami, as described in the report.
Small-Cap Stocks and Consumer Shares Attract BofA Interest
Despite its cautious overall outlook, Bank of America sees opportunities in market segments that could benefit if Treasury yields have reached their peak.
The strategists are increasing exposure to small-cap stocks, real estate investment trusts (REITs), and consumer discretionary companies.
Consumer discretionary stocks are receiving particular attention because investor positioning remains unusually weak.
According to BofA’s October fund manager survey, institutional investors are more underweight the consumer discretionary sector than at any point since July 2008.
Such extreme positioning could create opportunities if economic conditions stabilize and market sentiment improves.
Small-cap stocks and REITs could also benefit from declining bond yields, which may lower financing costs and improve their relative attractiveness.
However, a sustained rise in interest rates would remain a significant risk to these investments.
Bank of America Remains Cautious on AI and Technology Stocks
While identifying opportunities in selected sectors, Bank of America is avoiding additional exposure to technology stocks.
Its latest fund manager survey showed that investors hold their largest overweight positions in technology since August 2020.
This concentration raises concerns about crowded trades, particularly in companies linked to artificial intelligence.
The survey also suggested that expectations of an AI market bubble emerging in 2027 have become widespread among respondents.
BofA believes the next phase of the AI investment cycle will depend heavily on financing conditions and the profitability of infrastructure spending.
The strategists are particularly focused on semiconductor prices as an indicator of the sector’s underlying strength.
Further increases in semiconductor prices could support expectations of continued AI investment and robust demand.
Conversely, a sustained decline could indicate tightening credit conditions, weaker spending, and a potential peak in AI-related capital expenditure growth.
Gold, Commodities and Emerging Markets Remain Long-Term Favorites
Beyond the immediate market outlook, Bank of America continues to favor several asset classes over a longer investment horizon.
The bank maintains positive positions on gold, commodities, and emerging market assets.
It also recommends that investors reduce their structural underweight exposure to bonds and China.
These preferences reflect a strategy of balancing defensive positioning with opportunities that may benefit from changing global economic conditions.
Gold and commodities could provide diversification amid geopolitical uncertainty and persistent inflation concerns.
Meanwhile, emerging markets may offer opportunities as investor positioning and global capital flows evolve.
Nevertheless, Bank of America expects artificial intelligence to remain one of the most important forces shaping financial markets through 2027.
Global Equity Funds Attract $64.5 Billion in One Week
Despite mounting market risks, investors continued allocating substantial capital to global equities.
According to BofA, worldwide stock funds attracted approximately $64.5 billion during the week ending October 14.
At the prevailing pace, annual inflows were projected to reach a record $1.3 trillion.
US equity funds accounted for $39.1 billion of the weekly total, putting their annualized inflow rate at a record $636 billion.
Bond funds attracted another $11.8 billion, while gold funds received approximately $100 million.
In contrast, money market and other cash funds experienced outflows of $53.1 billion.
Cryptocurrency funds also recorded withdrawals of approximately $600 million.
The figures suggest that investors continued seeking exposure to financial assets despite growing uncertainty surrounding interest rates, technology valuations, and geopolitical risks.
Treasury and Investment-Grade Bond Demand Remains Strong
Demand for US government bonds continued to show resilience.
Treasury funds attracted $3.6 billion, marking their 16th consecutive week of inflows.
This represented the longest uninterrupted inflow streak since August 2024.
Investment-grade corporate bond funds received an additional $3.5 billion.
Municipal bond funds extended their inflow streak to 26 weeks, attracting $4.5 billion during the latest reporting period.
Emerging market debt also maintained positive momentum, recording its 11th consecutive week of inflows at $800 million.
However, high-yield bond funds experienced withdrawals of $900 million, marking their third straight week of outflows.
The divergence suggests that investors remain selective within fixed-income markets, favoring higher-quality debt while showing greater caution toward riskier borrowers.
Emerging Market Equities Outperform European Fund Flows
Regional equity flows revealed substantial differences in investor demand.
Emerging market stock funds attracted $17.7 billion, extending their inflow streak to three consecutive weeks.
Japanese equity funds also returned to positive territory, receiving approximately $400 million.
European equity funds, however, experienced outflows of $1.5 billion.
Within the United States, every major equity fund style recorded inflows.
Large-cap stocks attracted the largest share, with approximately $32.5 billion entering these funds.
Technology remained the leading sector for new investment, receiving $10.7 billion.
By contrast, financial sector funds recorded withdrawals of $1.4 billion, while consumer-focused funds experienced outflows of $600 million.
The continued inflows into technology stocks highlight the contrast between strong investor demand and Bank of America’s concerns about stretched positioning.
What Comes Next for the Stock Market?
Bank of America’s latest outlook suggests that investors could face a challenging period as higher real yields and uncertainty surrounding AI investments continue to influence market sentiment.
The bank’s preferred defensive strategy reflects concerns that geopolitical developments, restrictive monetary policy, and crowded technology positions could trigger additional volatility.
Nevertheless, BofA also sees opportunities in assets that could benefit from declining long-term Treasury yields.
Small-cap stocks, REITs, and consumer discretionary companies may become more attractive if borrowing costs stabilize and investor confidence improves.
At the same time, semiconductor prices, AI financing conditions, and corporate credit markets will remain important indicators of the technology sector’s outlook.
For now, Bank of America continues to favor a risk-off approach, while maintaining longer-term exposure to gold, commodities, and emerging markets.
The coming weeks could prove particularly important as investors evaluate Federal Reserve policy, political developments, and the sustainability of the artificial intelligence investment boom.
