BofA Strategists See Better Stock Breadth as Fed Rates Diverge

As the Federal Reserve continues its hiking cycle, diverging monetary policies between the U.S. and other major central banks are creating opportunities for investors. Bank of America (BofA) strategists, led by Michael Hartnett, have highlighted the potential for improved stock breadth in the long term, driven by this divergence. In their January 2025 Global Fund Manager Survey, they noted that equity market breadth remains weak but could improve with rising global PMIs and diverging monetary policies.



The Fed's hiking cycle, in contrast to the rest of the world cutting interest rates, creates a favorable environment for U.S. equities. Over the past decade, the U.S. has been the dominant market in regional equity flows, attracting $1.2 trillion in inflows compared to just $0.2 trillion for the rest of the world. This "US exceptionalism" bias, with investors holding US equities 1.2 standard deviations overweight relative to a 25-year history, indicates a long-term impact on global equity market breadth.



Investors are bullish on U.S. equities due to policy shifts by the new presidential administration and improving U.S. productivity. Savita Subramanian and Jared Woodard, analysts at BofA Global Research, discussed investment opportunities in 2025, highlighting the potential for mega cap tech to keep outperforming. The most crowded trades remain "long Magnificent 7" tech stocks and "long US dollar," indicating significant investor interest in U.S. equities.

However, the expectations of continued US exceptionalism in equity markets also have potential implications for the rest of the world. Capital inflows into the U.S. could drive up asset prices and contribute to a further widening of the wealth gap between the U.S. and other countries. The strong US dollar, driven by investor demand for US equities, could put downward pressure on the currencies of other countries, making their exports more expensive and imports cheaper, potentially impacting trade balances. If the US market experiences a correction or a bear market, the global impact could be significant, given the high level of investment in US equities by global fund managers.

In conclusion, the divergence in monetary policies between the Federal Reserve and other major central banks is creating opportunities for investors in the long term. U.S. equities are expected to benefit from this divergence, with improved stock breadth and continued investor interest. However, the implications for the rest of the world should not be overlooked, as capital flows and currency dynamics could be significantly impacted. As always, investors should stay informed and adapt their strategies to capitalize on these changing market dynamics.