Bank of America strategist Michael Hartnett says the S&P 500 falling under the 6,600 level has precipitated what he calls the beginnings of "policy panic," though he maintains that current market indicators do not yet show the kinds of investor capitulation or macro deterioration that typically mark durable market lows.
In a written note, Hartnett framed the developing policy environment as likely to evolve into a broader support mechanism for markets. He wrote that he assumes policymakers will resort to measures aimed at avoiding a recession and suggested investors position for that outcome. Specifically, Hartnett recommended long yield curve steepeners in combination with consumer stocks as the trades he prefers under this outlook.
Within equities, Hartnett singled out the Consumer Discretionary sector. He noted that the sector is trading at relative lows comparable to past crisis periods, including 2008 and 2020, and labeled the idea a "fave contrarian long." He emphasized opportunities within lower-income consumer segments, linking the thesis to an anticipated post-election or post-conflict policy pivot focused on affordability pressures and weak approval ratings.
Hartnett counseled patience for investors, summarizing his stance with the phrase "no rush, no greed." He also set out a scenario in which gold and international equities could regain leadership if the U.S. dollar weakens and fiscal expansion outside the United States grows.
At a broader level, the strategist characterized markets as being caught between competing "pain trades." He outlined two possible next major market moves: a rally to new highs led by private credit, or a deeper drawdown driven by the semiconductor sector. Hartnett reiterated that current market measures have not yet reflected the kind of capitulation or macro worsening usually associated with lasting market bottoms.
Hartnett also described a shifting macro regime. He said markets are rotating away from a late-2025 environment dominated by liquidity and AI-driven optimism toward dynamics more consistent with stagflation and a heightened risk of recessionary conditions in 2026.
Fund flow figures cited in the note painted a more defensive posture among investors in the most recent week. Overall, bond funds were the only major asset class to record inflows, taking in $2.7 billion, while equity funds experienced $29 billion in outflows, according to the Bank of America data included in the note.
Flows by category and region included:
- U.S. equities - $23.6 billion of outflows, the largest weekly withdrawal in 13 weeks.
- European equities - $3.1 billion of outflows, the biggest since April.
- Materials funds - a record $10.5 billion in redemptions.
- Money market funds - $35 billion of outflows, recorded as the first and largest withdrawal in 10 weeks.
- Gold funds - $6.3 billion of outflows, the largest weekly exit since October.
- Crypto funds - $500 million of outflows.
In fixed income, demand concentrated in shorter-duration securities. Short-term bond funds attracted $13.3 billion, noted as the third-largest inflow on record, while long-term bonds experienced $4.7 billion of outflows, the second-largest ever and the biggest since March 2020. High-yield bond funds extended a multi-week withdrawal trend, with three-week outflows totaling $13.5 billion.
Regionally, emerging market equities returned to inflows with $700 million added, and Japan continued a run of investor interest, extending its inflow streak to seven consecutive weeks with $400 million.
Hartnett's note lays out a framework rather than a forecast. He emphasized the potential for policy reactions intended to avert recessionary outcomes and the associated trades he views as appropriate under that scenario, while also flagging the alternate pathway in which sector-specific weakness - particularly in semiconductors - could deepen market declines. Investors looking to translate those views into positioning will need to weigh the evolving data and the pace of any policy responses.
Key takeaways
- Hartnett interprets the S&P 500 dipping below 6,600 as a trigger for policy-driven market support; he favors long yield curve steepeners and consumer stocks.
- Consumer Discretionary is trading at relative lows comparable to 2008 and 2020, making it a preferred contrarian long, especially in lower-income segments.
- Fund flow data show a defensive tilt: bond inflows of $2.7 billion versus $29 billion of equity outflows, with notable redemptions in materials, money market, gold, and crypto funds.
Risks and uncertainties
- Macroeconomic trajectory - The note outlines a potential shift toward stagflation and possible recessionary conditions in 2026, which could weigh on cyclically sensitive sectors such as semiconductors and materials.
- Sector-driven downturn - Hartnett acknowledges an alternative path where a deeper decline could be driven by weakness in semiconductors, posing downside risk to technology and related capital goods sectors.
- Flow volatility - Large and concentrated fund outflows across equities, materials, and other asset classes add uncertainty to market liquidity and price formation.