13 posts from 7 reports.
The Fed meets Wednesday, and BofA's economists expect a 25 basis point hike. After a hot CPI print last week, the market now prices more than 20 basis points for this meeting and over 80 basis points of hikes across the next year. Chairman Warsh can point to the flattening Treasury curve as proof that tighter policy is rebuilding the Fed's inflation-fighting credibility. If the Fed backs off after the latest data, BofA warns the long end of the bond market could sell off harder than it did after the July meeting.
This is a setup the market is not fully positioned for. BofA's equity strategists keep favouring Value, which has historically outperformed while the Fed hikes and offers income that holds up against inflation. Value ETFs give the cleanest exposure. The Invesco Large Cap Value fund (PWV) holds 65% in financials, energy and materials. The Putnam fund (PVAL) has compounded at 16.8% a year over five years against 12.8% for the S&P 500, with less than half the tech weight. The thesis breaks if incoming data soften enough to give Warsh cover to pause.
Own large-cap Value, which tends to win in hiking cycles and pays inflation-protected income.
REITs have beaten the market this year, and the fundamentals keep coming in stronger than expected. In the second quarter, 72% of REITs beat estimates against a 62% historical average, and 87% raised their guidance against a 60% average. The bigger driver is supply. New construction is slowing across most property types, with new supply in industrial, apartments and self-storage down 20% to 50% from its peak. Less new building hands pricing power back to existing landlords and improves the outlook into 2027.
BofA's new scoring model ranks healthcare and retail as the sectors best able to compound earnings steadily over the coming years. Welltower (WELL) ranks second overall and American Healthcare REIT (AHR) ranks fifth, and both sit on BofA's buy list. The price targets imply real upside: $292 for Welltower against about $236 today, and $71 for AHR against about $54. The clear risk is that rates stay higher for longer, which raises the cost of the debt these landlords use.
Own healthcare and retail REITs. BofA's top picks are Welltower and American Healthcare REIT.
BofA prefers to measure company quality by free cash flow yield, because cash is hard to fake and easy to compare across firms. That measure is up almost 40% this year and on pace for its best year since 2000. The reason is simple. As the whole index gets more expensive, the free cash flow yield on the S&P 500 has fallen to a record low, so the firms that still throw off plenty of cash stand out and command a premium.
The VictoryShares Free Cash Flow ETF (VFLO) is up 37.5% this year. It trades at 13.7 times forward earnings against 21.3 times for the S&P 500, and it leans about 40% into energy and healthcare. That combination, cheap and cash-rich, is exactly what tends to work when money gets tighter and the cost of capital rises. It is a way to own quality without paying the index multiple.
Tilt toward high free-cash-flow businesses. The VictoryShares Free Cash Flow ETF is one clean way in.
The 30-year Treasury yield has risen to about 5.4%, the highest in roughly 20 years, and long bonds are down 10% over the past year. Yet equities are up 16%, carried by earnings growth of 28% this year and 21% next. JPMorgan studied 80 years of data and found a curved relationship between yields and stock valuations. Rising yields lift multiples at first, then start to hurt them past a tipping point. Where that tipping point sits depends on how fast earnings are growing.
When earnings grow above 20%, as consensus expects now, that tipping point is far away. History says the S&P 500 multiple can hold up until the 10-year yield reaches roughly 6%. The index trades at about 18 times next year's earnings, so JPMorgan sees room for the multiple to hold or even rise, as long as the strong earnings actually show up. The bank stays with large-cap Growth and Quality. The real risk is not the level of rates. It is whether the earnings growth proves durable.
Do not sell equities on rising yields. Stay in large-cap Growth and Quality.
It is tempting to blame rising long-term yields on the US deficit, now running at 6.3% of GDP with gross debt near $40 trillion. JPMorgan sees a bigger force at work. The AI build-out is soaking up capital. Hyperscalers have raised about $225 billion of debt this year, against just $50 billion in 2022. Foreign investors are following that private money: over the past year they bought $390 billion of US corporate bonds while cutting their Treasury purchases to $329 billion, down from $561 billion a year earlier. The market is simply clearing at a higher yield because demand for capital is strong.
JPMorgan builds this into a long-short screen. Its "debasement winners," stocks that gain when hard assets rise and Treasuries fall, are up about 11% since the June lows and lean heavily into precious metals and crypto-linked names. Its "debasement losers," names most exposed to high rates, are down about 11% and are full of rate-sensitive consumer stocks, bond proxies and banks. The trade is to own the first basket against the second.
Play the theme through debasement winners. JPMorgan's screen leans into precious metals and crypto.
The 30-year Treasury yield has climbed from 4.83% to 5.32%, its highest since 2007, as investors grow wary of lending to heavily indebted governments. The striking part is where the money is going. Foreign investors are now buying more US stocks than US Treasuries, a reversal of the old pattern where bonds were the automatic safe haven. Norway's $2.3 trillion oil fund has proposed cutting its Treasury holdings by about $80 billion and buying mortgage debt instead.
The head of FX research at Deutsche Bank calls it a "huge shift" and says US assets are "no longer risk free" as the government's balance sheet worsens. A BlackRock strategist puts it plainly: government bonds are not as risk-free as they used to be, so investors are treating equities as the safer long-term bet. For now this props up the US stock market even as bonds struggle. The risk is that if yields keep climbing, the pull of higher bond returns eventually starts to compete with stocks again.
The safe-haven premium on Treasuries is fading. US stocks are absorbing the flows.
The Bank of Japan is set to raise its policy rate to the highest level in 31 years, and the yen has already strengthened to its strongest since February, pushing past 153 to the dollar. For years investors borrowed cheaply in yen to buy higher-returning assets elsewhere, a strategy known as the carry trade. When the yen rises quickly, that trade becomes a loss and investors rush to unwind it, selling assets around the world to repay yen loans. A sharp move like this has rattled markets before.
Governor Ueda is walking a tightrope. Japan's new reflationary prime minister wants easy policy, while the US Treasury has signalled it would welcome a stronger yen. Ueda's fear is that moving too fast tips Japan back into the deflation it spent decades escaping. For global investors the takeaway is narrower. A surprise from the Bank of Japan, or a poorly received message, can trigger a yen spike, and that is the channel through which a Tokyo decision reaches portfolios everywhere.
Watch the yen. A fast rally can force an unwind of the carry trade and shake global risk assets.
The equity market had been resilient all year until Brent crude pushed above $100 last week, after Iran-backed Houthis captured a strategic Red Sea port. Oil and the bond yields that moved with it finally started to bite. JPMorgan's response is to buy the dip. Over the past two years the pattern has been "escalate to de-escalate," where each flare-up dents stocks and then reverses on de-escalation headlines. Selling into an oil-driven drop has repeatedly left investors whipsawed when the news turned.
The wider backdrop still supports stocks. Global equities are up 15% this year, earnings revisions are positive across regions, and long-term inflation expectations are not reacting to the oil spike the way they usually do. Market internals are risk-on: cyclicals are leading and defensive stocks have slid back to the year's lows. JPMorgan expects third-quarter results in October to reassure investors, and it stays overweight mining, capital goods and semiconductors. The risk is a further, sustained spike in oil that the earnings story cannot offset.
Use the oil-driven selloff to add to cyclicals: mining, capital goods and semiconductors.
While most investors group software with the AI winners, JPMorgan's European strategy team puts Software and Media in its underweight column. The reason is disruption. The same AI tools driving the boom also make it cheaper to build software and produce media, which threatens the pricing power of the incumbents that sell those products. JPMorgan expects both groups to keep struggling regardless of near-term activity, even if oversold conditions spark the occasional bounce.
The team would rather own the parts of the market tied to real-world investment spending. It is overweight capital goods, supported by spending on electrification and infrastructure, and overweight mining and semiconductors as a recovering China cycle helps previously weak cyclicals. The message is to separate the companies that benefit from AI spending on physical kit from the software names whose product is now getting easier to replicate. The risk to the call is that AI monetisation arrives faster for software than the bears expect.
Avoid Software and Media as structural laggards. Favour cyclicals with real capital-spending demand.
Last week ended with the leaders of OpenAI, Anthropic, xAI and Google's DeepMind all agreeing that AI development should slow down. Investors listened and then bought more AI stocks. Microsoft, Alphabet and Meta, three of the biggest cloud operators, each rose 2% or more. The gains came from a rotation out of the chipmakers that supply AI hardware and into the customers whose data centres buy it.
The logic is about who keeps the profit if the boom cools. The market concluded that Microsoft and its peers will remain among the world's most profitable companies even if AI spending loses speed, because their earnings come from selling cloud services rather than gear. Chip suppliers like Micron are more exposed, since their sales depend directly on how much hardware the data centres keep ordering. For investors who want to stay in the AI trade but worry about a slowdown, the takeaway is to own the platforms rather than the picks and shovels.
For AI exposure, favour the hyperscalers over the hardware suppliers.
Mall values are up 13% over the past year, according to Green Street. That beats all 10 commercial property sectors and is more than double the rise in commercial real estate overall. The recovery is not limited to trophy malls. Middle-market centres are seeing occupancy and sales grow too, helped by the fact that almost no new malls have been built for years while weaker ones have closed, which tightens supply and lifts the value of what remains.
The clearest example is CBL Properties, which spent a year in bankruptcy after the pandemic and has since bought five new properties. Its stock is up 48% this year. Landlords report that younger shoppers are coming back to malls to shop and socialise, which was not part of the old "death of the mall" story. Values still sit well below their peak from a decade ago, so plenty of investors stay sceptical. That gap is also where the remaining upside lives if the recovery holds.
Look at mall landlords. Values are rising fastest here as supply shrinks and shoppers return.
Deutsche Bank argues the economy has shifted into a supply-driven world, and that changes how investors should position. In the 2010s the constant worry was weak demand, which kept inflation and interest rates low. Now growth is limited by shortages instead. This year the Strait of Hormuz, which carried about a quarter of the world's seaborne oil, has been largely closed, pushing Brent back above $100. Add ageing populations, the cost of reshoring factories and higher defence spending, and there is little spare capacity left to absorb new demand without prices rising.
Three things follow. Inflation will spike more often, because there is no slack to soak up extra demand. Rate cuts will do less, because cheaper money cannot fix a blocked shipping lane. And government spending becomes more inflationary, because it now competes with private borrowing rather than filling a gap. US inflation has already run above 2% since early 2021. For portfolios, that argues for owning real assets, energy and commodities, and companies that can raise prices, while treating long bonds with more caution.
Position for stickier inflation. Favour energy, commodities, real assets and firms with pricing power.
Tech leaders spent the weekend warning about catastrophic AI risk, and Deutsche Bank's answer is that famous minds have a poor record predicting technology. Geoffrey Hinton told people to stop training radiologists in 2016; the number of radiologists has since grown about 10%. The doom debate makes dramatic headlines but says little about what investors should do. The more useful point is that the hyperscalers plan to spend more than $5 trillion over five years, and that bet only pays off if enterprises actually adopt AI before the chips age out.
The risk that matters is political. Concern about AI has become a rare bipartisan issue ahead of the November midterms, and local opposition to data centre construction is turning into a rallying point for voters in a way vague job fears never did. Senator Sanders has floated wide-ranging legislation, and President Trump has dismissed the safety worries as a hoax. For anyone invested in AI infrastructure, the thing to track is not an AI apocalypse. It is whether opposition to data centres and new rules start to slow the build-out.
Watch the regulatory and political risk to AI infrastructure, not the doom headlines.
