(Bloomberg) -- The latest economic data that reinforced speculation the Federal Reserve will be able to cut rates as early as September is poised to spur appetite for more speculative corners of the stock market, according to strategists at Bank of America Corp.
Equities with a generally higher debt burden, like small caps and REITs, as well as emerging-market stocks and the UK’s FTSE 100 Index may stand to benefit as policymakers get closer to easing after the most aggressive tightening cycle in a generation, a team led by Michael Hartnett said Friday in a note to clients.
Emerging-market equities are one of the ways to play an imminent rate reduction as the US dollar weakens, Hartnett, BofA’s chief investment strategist added. He called the FTSE 100 the “anti-Nasdaq.”
Meanwhile, BofA’s bull and bear indicator, a contrarian sentiment gauge, rose to the highest level since March, driven by inflows to emerging-market stocks and bonds, improved breadth across global equity markets and less hedging on the S&P 500 Index.
Further signs that inflationary pressures are slowing down appeared on Thursday, when data showed the so-called core consumer price index climbed 0.1% from May, the smallest advance in three years.
Optimism over lower rates sparked a shift into riskier pockets of the market on Thursday — as money exited the long-favored safety trade of big tech. The Nasdaq 100 Index slid 2.2% and the S&P 500 fell 0.9%, even as about 400 of the broader gauge’s constituents rallied, amid a rotation out of the latest high fliers into areas like small-caps.
The Russell 2000 Index is up 6.1% since Monday, on pace for its best weekly gain since November.
BofA strategists say there is little evidence currently of clients selling stocks to buy bonds, which would change significantly if the risk of a hard landing increases. “Until investors need to buy bonds, they ain’t selling tech,” Hartnett wrote.
--With assistance from Jeran Wittenstein and Bre Bradham.
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