Bank of America is advising investors to adopt a defensive posture for November, with strategist Michael Hartnett outlining four distinct pressures that extend well beyond the upcoming midterm elections. The S&P 500 currently hovers near record levels, yet Hartnett sees multiple forces simultaneously undermining the supports for corporate earnings and equity valuations.
Persistent High Yields Intensify Competition for Stocks
Hartnett anticipates the Federal Reserve will raise interest rates again on October 28, arguing that policymakers need to rebuild credibility in their fight against inflation. Elevated yields create a dual challenge for equities: they increase financing costs and make bonds more attractive relative to stocks. This is particularly burdensome for companies reliant on refinancing or those with profits expected far in the future.
However, Hartnett also identifies a potential mitigating factor. A credible tightening move could reduce longer-term Treasury yields by an additional 20 basis points, potentially offering some support to equities if investors gain confidence that inflation will recede.
Oil Price Pressures Threaten Margins and Consumer Spending
Geopolitical conflicts in the Middle East and Ukraine are complicating the energy supply outlook, making oil another reason for BofA's caution. Hartnett views these geopolitical tensions as a key threat alongside interest rates and election uncertainty, with economic implications extending well beyond the pump.
Sustained high energy costs can significantly squeeze margins in transportation and manufacturing, while also reducing households' disposable income for discretionary purchases. This combination of weaker spending power and insufficient inflation relief creates a difficult environment for companies trying to pass on higher costs, while central banks have limited room to support demand.
Potential Democratic Sweep Could Reshape Policy Expectations
Hartnett also highlights the growing possibility that Democrats could capture both chambers of Congress in the November 3 midterms. His concern centers on a decisive outcome that might force investors to reassess the policy assumptions embedded in asset prices. While election probabilities remain market expectations rather than confirmed results, and congressional control alone does not determine legislation, the immediate risk is repricing. Businesses and investors could delay decisions while assessing the balance of power and potential policy changes, adding another obstacle for a market already grappling with expensive capital and uneven confidence.
AI Financing Worries Undermine a Key Market Driver
The fourth concern strikes at a central source of market enthusiasm: artificial intelligence. Investors are increasingly scrutinizing whether heavily financed infrastructure expansion can generate returns quickly enough to justify its costs. CoreWeave's shares were heading for a weekly decline exceeding 22% on October 16, as concerns about borrowing and interest rates weighed on the AI infrastructure trade.
The broader implication is that strong demand alone may no longer satisfy shareholders. Financing terms, cash generation, and repayment capacity are becoming more critical. Pressure across both AI stocks and credit markets suggests investors are demanding stronger evidence that expansion can become financially sustainable.
Selective Opportunities Despite the Caution
Hartnett's defensive stance still leaves room for selective exposure. He favors potential beneficiaries of peaking bond yields, including small-cap stocks, real estate investment trusts (REITs), and the consumer discretionary sector. These areas could gain breathing room if longer-term borrowing costs decline.
This makes the recommendation more nuanced than a blanket call to abandon equities. The opportunity depends partly on the source of any yield decline: improving inflation confidence would offer a healthier backdrop than a sharp deterioration in growth. For November, the key question is whether lower yields can ease financial pressure while confidence in corporate earnings and AI investment holds together.
This article is for informational purposes only and does not constitute financial advice.
