As expectations of interest rate cuts gradually heated up, and the probability of Trump winning the election increased, the US stock market was gradually dominated by the two trends of “interest rate cut transactions” and “Trump transactions.”

On July 18, Bank of America's chief strategist Michael Hartnett released the latest research report saying that in the week ending this Wednesday, US stocks ushered in the fourth largest weekly capital inflow in history. It is expected that around September 18 (the Federal Reserve's September interest rate meeting) and November 5 (US election results announced), “buying rumors and selling news” is still the general trend.

Current market pricing shows that the probability that the Federal Reserve will cut interest rates in September is 100%, Trump's chance of winning the November election is 75%, and the probability of a “soft landing” for the US economy is 68%.

Based on the current market situation, Hartnett believes that the market's risk appetite is rotating rather than fading. It is expected that capital will flow from the US dollar to gold, from large stocks to small stocks, and the market will shift from momentum trading to volatility trading.

Money is pouring into small-cap stocks, bonds, and commodities

Citing EPFR Global data, the report tracks capital flows in the global market over the past week:

The inflow of stocks was 47.7 billion dollars, the inflow of bonds was 21.6 billion dollars, the cash inflow was 4.6 billion dollars, the gold inflow was 1.8 billion dollars, and the cryptocurrency inflow was 1.7 billion dollars.

Gold: The inflow of 1.8 billion US dollars is the largest inflow since March 2022;

Bonds: The inflow of 21.6 billion US dollars is the largest inflow since October 2020 and the eighth largest weekly inflow in history;

Treasury bonds: The inflow of 5 billion US dollars was the 11th consecutive week of inflows, setting the longest continuous inflow record since November 2023;

Investment grade bonds (investment grade bonds): inflow of 9.1 billion US dollars, the 38th consecutive week of inflows;

High Yield Bonds (High Yield Bonds): The inflow of 4.4 billion US dollars is the largest weekly inflow since November last year;

US stocks: The inflow of 44.8 billion US dollars is the fourth largest capital inflow in history;

European stocks: outflows of 1.4 billion US dollars, outflows for the ninth consecutive week;

Technology stocks: inflows of 2.4 billion US dollars, the third consecutive week of inflows, the largest net inflow in four weeks;

Financial stocks: the inflow of 1.3 billion US dollars, the largest weekly inflow since November last year;

Small-cap stocks: The inflow of $9.9 billion was the second-largest weekly inflow in history.

As far as Bank of America customers are concerned, the current asset management scale is 3.7 trillion US dollars, of which stock positions account for 62.5%, bonds account for 19.7%, and cash accounts for 11%; the inflow of funds from Chinese bonds is the largest in 4 months.

Furthermore, the Bank of America's bullish and bear indicators have risen to the highest level since March, with a reading of 6.5. Generally speaking, when this indicator rises to 8, it indicates that the stock market has “gone too far”, triggering a “sell signal.”

The report explains that the driving force behind the recent rise in bulls and bears is the continued inflow of capital into high-yield bonds and emerging market bonds, which shows that the credit market is technically strong.

Overall, compared to the earlier situation where gains were concentrated in large-cap technology stocks, gains in the US stock market began to “widen” and spread to small-cap stocks, bonds, and gold.

“Anti-consensus”: Trump's victory or deflation?

Currently, the market generally believes that as Trump's probability of winning the election continues to rise, his policy combination of domestic tax cuts+external tariffs+immigration restrictions may increase the risk of inflation, thereby increasing bond yields.

But the Hartnett team made a different point of view. The report said that the current global economic environment is different from the environment where the macroeconomy was strong and interest rates were low during trade frictions in 2018. Instead, the new tariffs may pose a risk of recession to the global economy, which in turn will benefit the bond market.

Historical data shows that when there is a recession in the US, the 2/10 year US bond yield curve will be steeper, and the same trend is currently showing.

The report also predicts that considering that the growth expectations of the US economy are declining more sharply than Europe and Japan, if the current trade friction is mainly focused on the technology sector and is not as extensive, then its impact on the US dollar may not be as positive as the market generally expected, and gold may benefit more as a safe-haven asset.

edit/emily