BofA Strategists See Better Stock Breadth as Fed Rates Diverge

(Bloomberg) -- Stock gains could become more broad-based as global central banks cut interest rates faster than the Federal Reserve, helping growth to pick up, according to Bank of America Corp. strategists.

A team led by Michael Hartnett said equity breadth is “still poor,” pointing to the strong showing by the US benchmark S&P 500 versus its equal-weighted counterpart and other international equities. But if an expansion in global business activity takes hold as interest rates fall everywhere but the US, the concentration of the best-performing stocks could start to broaden more generally.

US shares have soared over the past two years, far outperforming international stocks amid an artificial intelligence frenzy and a solid economy that’s bolstered profits. But so far in January, Europe has managed to take the lead as investors anticipate President Donald Trump’s tariffs will be less harsh than initially expected.

According to Hartnett, catalysts for further risk-on moves would be gold climbing over $2,800 an ounce and the New York Stock Exchange Composite Index surpassing the 20,500 level — 2.6% higher than current levels. In recent weeks, he and his team have repeatedly stated a preference for stocks in Europe, China and emerging markets amid policy easing in those regions.

For now, the strategists cite a “virtuous cycle” in the US of higher equity prices translating to more wealth, which is then recycled again into risk assets. It’s a “self-fulfilling catalyst for ‘US exceptionalism,’” Hartnett wrote.

In terms of equity flows, US stock funds got $7 billion of inflows in the week through Wednesday. Europe funds had $200 million pulled out, the 17th week of outflows. Emerging market equity funds had $3.4 billion of redemptions.

--With assistance from Michael Msika and Sagarika Jaisinghani.