BofA favours 'risk-off' for November; reasons go beyond midterm elections

• High yields create dual pressure by raising corporate financing costs and making bonds more attractive versus equities, though BofA sees potential relief if credible Fed tightening lowers longer-term Treasury yields by another 20 basis points
• Geopolitical tensions in the Middle East and Ukraine are driving oil prices higher, squeezing transport and manufacturing margins while reducing household discretionary spending power
• Despite the defensive call, BofA favors selective exposure to small caps, REITs, and consumer discretionary stocks that could benefit if bond yields peak and borrowing costs decline

Summary

Key Recommendation: Bank of America strategist Michael Hartnett advises a "risk-off" defensive stance for November, citing multiple headwinds beyond the upcoming midterm elections, despite the S&P 500 trading near all-time highs.

Four Primary Concerns:

1. High Yields: Hartnett expects yields to remain elevated as policymakers work to rebuild inflation-fighting credibility. Higher rates increase corporate financing costs and make bonds more competitive with equities. However, a credible tightening move could lower long-term Treasury yields by 20 basis points, providing some relief.

1. Oil Prices: Geopolitical tensions in the Middle East and Ukraine threaten energy supplies. Persistently high oil prices squeeze manufacturing and transport margins while reducing household discretionary spending power, creating a difficult environment where companies struggle to pass costs to consumers.

1. Election Uncertainty: The possibility of a Democratic sweep of both congressional chambers could force investors to reassess policy assumptions embedded in current asset prices, potentially triggering market repricing and delayed investment decisions.

1. AI Investment Concerns: Investors are questioning whether heavily financed AI infrastructure can generate returns quickly enough to justify costs. CoreWeave's financing pressures exemplify growing scrutiny, with markets demanding stronger evidence of financial sustainability beyond mere demand.

Investment Opportunities: Despite the defensive posture, Hartnett identifies selective opportunities in small-cap stocks, REITs, and consumer discretionary sectors—areas that could benefit if long-term borrowing costs decline due to improving inflation confidence rather than economic deterioration.

Market Implications: The analysis suggests November may see increased volatility as multiple risk factors converge, with the key question being whether yield declines can ease financial pressures while maintaining confidence in corporate earnings and AI investments.