Bank of America chief investment strategist Michael Hartnett said U.S. equities have become "too big to fail," a dynamic that has discouraged investors from placing short bets unless policy itself falters. In a note, Hartnett cautioned that short sellers will remain largely sidelined "until policy fails" - a failure he defined in concrete terms as a collapse in the dollar and bond markets or a credit event.
The strategist's message helps explain why equities continue to draw substantial money even as macroeconomic concerns persist. Hartnett pointed to the speed with which policy moves have reversed selloffs since the Global Financial Crisis, noting that markets often calm when policymakers begin to act - and that policy easing has promptly checked Wall Street bears and market corrections.
One market snapshot Hartnett highlighted showed the S&P 500 trading roughly 4% below its 200-day moving average in the immediate aftermath of a ceasefire announcement, illustrating how quickly policy-driven relief can arrest downward moves.
Looking ahead to the second quarter, Hartnett and his team expressed a tactical preference for long yield curve steepeners, a stance taken as markets increasingly price out the likelihood of further central bank rate increases.
On the equity side, the strategists identified several areas of opportunity. They favor Chinese technology stocks as a way to tactically position for a potential U.S.-China détente, noting a possible Trump-Xi summit penciled in for May as a contextual factor in that view. Consumer stocks were also listed among favored sectors, with the team expecting a policy pivot aimed at improving affordability on Main Street.
The team expressed a preference for semiconductors over the broader Magnificent 7 cohort, conditioned on the assumption that large AI platform companies - described as "AI hyperscalers" - would be more willing to take on additional debt and cut jobs than to retreat in the face of an AI capital expenditure arms race.
Flow data underpinning Hartnett's outlook showed a mixed, cautious investor stance. For the week ended April 8, investors added $70.7 billion to cash funds - the largest weekly inflow in nine weeks - a sign of preserved caution beneath the market's bullish veneer. Stock funds took in $36.8 billion, the biggest weekly inflow in three weeks, leaving year-to-date equity inflows at $275 billion and on track for a record.
Other notable flows included a $2.1 billion withdrawal from energy funds - their first outflow since November - and a 12th consecutive week of outflows from consumer stock funds, the longest such run since February 2003. Gold drew $3.5 billion, its largest weekly inflow in six weeks, while Treasuries extended a ten-week inflow streak with $5.3 billion, and high-yield bond funds recorded their first inflow in seven weeks at $1.6 billion.
Hartnett's note paints a market where policy actions and the prospect of intervention continue to influence positioning heavily, with investors maintaining significant cash buffers even as stock allocations rise.
Why this matters
The combination of strong equity inflows and large cash allocations suggests that market participants are willing to own risk assets but remain wary of policy or macro shocks that could force a reassessment.