Bank of America sees little reason for investors to rush back into stocks ahead of November.
Strategist Michael Hartnett favours a defensive stance because of a combination of stubbornly high borrowing costs, geopolitical tensions, election uncertainty and cracks in the AI trade.
His warning extends beyond who controls Congress – several forces supporting corporate earnings and stock valuations are coming under pressure simultaneously.
Higher yields leave stocks facing tougher competition
Hartnett expects the Fed to raise interest rates again on October 28, arguing that policymakers need to rebuild confidence in their inflation fight.
High yields create two problems for stocks: they raise financing costs and make bonds much more competitive with equities. That’s significant given businesses dependent on refinancing or distant profits face particular pressure.
Yet Hartnett also sees a potential release valve.
A credible tightening move could lower longer-term Treasury yields by another 20bps, potentially cushioning stocks if investors become more confident that inflation will retreat.
Higher oil prices threaten margins and household spending
Oil is another reason BofA remains cautious, with conflicts involving the Middle East and Ukraine complicating the outlook for energy supplies.
Hartnett identifies these geopolitical pressures as a key threat alongside interest rates and election uncertainty, especially since the economic implications reach well beyond petrol stations.
Persistently expensive energy can significantly squeeze transport and manufacturing margins, while leaving households with less money for discretionary purchases.
For investors, this means a difficult combination: weaker spending power and insufficient inflation relief.
Simply put, companies may struggle to pass higher costs through to customers, while central banks have less room to support demand.
A democratic sweep could unsettle policy expectations
Hartnett also flags the growing possibility of Democrats capturing both chambers of Congress in the November 3 midterms.
His concern centres on a potentially decisive result that could force investors to reassess the policy assumptions embedded in asset prices.
Election probabilities, however, remain market expectations rather than confirmed outcomes, and congressional control alone cannot determine subsequent legislation.
The immediate investment risk is repricing. Businesses and investors could delay decisions while assessing the balance of power and the scope for policy changes.
That uncertainty adds another obstacle for a market already wrestling with expensive capital and uneven confidence.
AI financing worries challenge a major market engine
The fourth concern strikes at a central source of market enthusiasm: artificial intelligence.
Investors are scrutinizing whether heavily financed infrastructure expansion can generate returns quickly enough to justify its costs.
CoreWeave’s shares were heading for a weekly decline exceeding 22% on October 16, as concerns about borrowing and interest rates weighed on the AI infrastructure trade.
The broader implication is that strong demand alone may no longer satisfy shareholders. Financing terms, cash generation and repayment capacity increasingly matter.
Pressure across both AI stocks and credit markets suggests investors are demanding stronger evidence that expansion can become financially sustainable.
Where BofA sees opportunities despite the caution
Hartnett’s defensive stance still leaves room for selective exposure.
He favours potential beneficiaries of peaking bond yields, including small cap stocks, real estate investment trusts (REITs) and the consumer discretionary sector.
These areas could gain breathing room if longer-term borrowing costs decline.
That makes the recommendation more nuanced than a blanket call to abandon equities.
The opportunity depends partly on the source of any yield decline: improving inflation confidence would offer a healthier backdrop than a sharp deterioration in growth.
For November, the key question is whether lower yields can ease financial pressure while confidence in corporate earnings and AI investment holds together.
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