A look at positioning ahead of next week's Fed meeting
2min read As markets await the Federal Reserve's decision next week, investors are closely watching for potential signals that could create a tailwind for bonds. The heavy allocation to equities, with Bank of America's private clients maintaining a 63.5% equity weighting—the highest in nearly three years—suggests a heightened sensitivity to any shift in policy tone. Should the Fed adopt a hawkish stance or hint at rate stabilization, it could prompt a rotation toward bonds, aligning with the 2025 playbook highlighted in BofA’s report. The anticipation of declining inflationary pressures and the potential for AI-driven productivity gains could further bolster fixed-income assets in the coming year.
Meanwhile, China’s equity market presents a compelling yet uncertain opportunity. Recent flows show a resurgence of interest, with $5.6 billion entering China equities—the largest inflow in nine weeks. This comes despite ongoing tariff uncertainties as geopolitical tensions simmer. Investors are cautiously optimistic, as China’s robust trade surplus and easing financial conditions provide a foundation for growth. However, the looming specter of new U.S. tariffs under the incoming administration keeps the outlook clouded. A resolution on trade policies could unlock significant upside potential, making China an attractive, albeit risky, play for global investors in 2025.
Here is Bank of America's recap of fund flows:
Recent Fund Flows: The latest data highlights robust inflows into equities ($8.8 billion) and bonds ($10.6 billion), while cash saw a significant outflow of $11 billion. Crypto attracted $4.1 billion in inflows, underscoring its appeal despite volatility, while healthcare experienced its largest outflow since February 2023 ($1.7 billion). Notably, China equities saw the biggest inflow in nine weeks ($5.6 billion), signaling growing investor interest.
Performance Trends YTD 2024: Among asset classes, crypto led the pack with a 91.7% YTD return, followed by gold at 29.5% and stocks at 22.1%. Commodities and investment-grade bonds also posted gains, while government bonds and oil lagged, with respective declines of 2.0% and 2.2%. This year’s performance underscores the dominance of high-risk, high-reward assets.
2025 Playbook: BofA projects a pivot in investor behavior in 2025 as the Federal Reserve’s anticipated hawkish turn could drive a rotation from equities to bonds. The playbook outlines a scenario where U.S. productivity gains from AI align with inflation moderation, setting the stage for a bond market reboun and potential global deflationary pressures.
Equities vs. S&P 500: Equity breadth remains a concern, with only 31% of stocks in the S&P 500 outperforming the index—levels comparable to late-1990s market bubbles. Despite strong performance from leaders, such as the Magnificent Seven tech stocks with a 62x trailing P/E, the narrow market participation highlights underlying vulnerabilities.
Asset Quilt Insights: The asset quilt shows U.S. equities up 29.6% YTD, outperforming other major equity markets like EM equities (11.2%) and Europe (6.2%). Commodities delivered mixed results, with standout performances in gold (32%) and natural gas (34.4%) offset by declines in oil (-1.9%). This diverse performance illustrates the uneven recovery across sectors and regions.
Macro Trends in Flows: While U.S. equities recorded a record $480 billion inflow YTD, bond markets saw steady allocations, especially into investment-grade bonds, which posted their 59th consecutive week of inflows. Meanwhile, emerging market debt continues to struggle, marking its eighth consecutive week of outflows.
Private Client Allocations: Bank of America's private clients, who manage $3.9 trillion in assets, showed a strong tilt toward equities at 63.5% of holdings, the highest in 34 months. Their largest equity purchases in recent weeks have been in MLPs, high-yield bonds, and bank loans, reflecting a preference for yield-generating assets amid ongoing market uncertainty.
Investment Themes and Outlook: The report emphasizes that markets are bracing for policy shifts, with the U.S. dollar and equities expected to experience volatility before stabilizing. China equities, bolstered by record trade surpluses and easier financial conditions, are highlighted as a promising entry point for global investors, particularly in early 2025.
This summary encapsulates the fund flow dynamics, year-to-date asset performance, and strategic outlook from BofA’s comprehensive market report.
