BofA Strategist Hartnett Warns of US Stock Overshoot in Early 2025

Bank of America Corp. strategist Michael Hartnett has warned investors about the potential for US stocks to overshoot in early 2025, citing several market trends and indicators. In a recent note, Hartnett pointed to the S&P 500's price-to-book ratio, which has surged to 5.3 times in 2024, approaching the peak of 5.5 hit in March 2000 during the height of the technology bubble. This high valuation ratio suggests that US stocks may be overvalued and at risk of a correction. Additionally, the S&P 500 was nearing 6,666 points, about 10% above current levels, which could indicate a frothy market. Despite these warning signs, the bank's bull-and-bear indicator showed no sign of exuberance among global investors, suggesting that a correction may not be imminent. However, Hartnett's neutral tone on equities in 2024, after being bearish in 2023, indicates a potential shift in market sentiment that investors should be aware of.



Hartnett's concerns about the US stock market are not unfounded. The S&P 500 has surged about 27% in 2024, driven by optimism around artificial intelligence and wagers that President-elect Donald Trump's "America First" policies would boost domestic markets. His support for crypto also helped bitcoin briefly rally past $100,000 this week. With a market capitalization of over $2 trillion, bitcoin is comparable to the 11th largest economy in the world. However, the rally in US stocks and cryptocurrencies has left these asset classes looking frothy, and investors should be cautious about potential risks.



China's sweeping stimulus measures could drive a broad rotation into stocks outside the US, as well as emerging markets and commodities, according to Bank of America Corp. strategists. "Unloved commodities — industrial metals, materials and international stocks" are the "best rotation breadth plays," so long as the steps announced by Beijing keep the new floor for China's 10-year yields at 2%, the team led by Michael Hartnett wrote in a note on Friday. Total stimulus could reach $560 billion, equivalent to more than 3% of China's GDP, the strategists said. At the same time, investors are the most underweight on commodities since June 2017, China equities are near a 50-year low versus their US peers, and Chinese property stocks are at levels last seen during the global financial crisis.

Investors should be aware of the potential risks and opportunities presented by these market trends and indicators. While the US stock market may be at risk of overshooting in early 2025, other asset classes, such as commodities and emerging markets, could present attractive opportunities for investors. As always, it is essential to conduct thorough research and consider the specific circumstances of each investment before making any decisions.