Bank of America's Hartnett: Japanese bank stocks are "a global leading indicator of risk aversion," with "four major contrarian trading opportunities" in the second half of the year.

Bank of America believes that the current market consensus is showing a rare and comprehensive optimistic trend - no one is bearish about the second half of the year. He warned that it is this consensus itself that breeds the most notable reverse trading opportunities. Bank of America's chief investment strategist Michael Hartnett outlined the "four nots" consensus in the market in the latest report: no landing, no interest rate hike, no reduction in AI capital spending, and the Democratic Party of the United States will not sweep the midterm elections. He believes that the failure of any of the above expectations will have a significant impact on asset prices, and has proposed four corresponding reverse trading strategies. At the same time, he issued a macro risk warning: once the rise in Japanese bond yields leads to weakness in Japanese bank stocks, it will be a "warning signal" of "global large-scale risk aversion sentiment". The four "not" consensuses of the market support risk appetite Hartnett summarized the dominant logic of the current market as four-fold consensus, pointing out that these four consensuses together suppressed the bearish forces in the second half of the year. First, the US economy will not land. The market generally expects the economy to not slow down significantly in the second half of the year, nominal growth will continue, and the logic of "all assets are holdable, except for bonds" driving assets - "can't buy bonds, can't sell stocks". Second, the Federal Reserve will not raise interest rates. Especially before the midterm elections, raising interest rates is not conducive to asset prices and the macro environment, so the Federal Reserve and major central banks around the world maintain a "moderately hawkish" position. It is worth noting that in this year of high inflation, the number of interest rate cuts (34 times) by global central banks in 2026 is still higher than the number of interest rate hikes (21 times). Third, AI capital spending will not be reduced. The market unanimously expects AI capital spending for super-large-scale cloud vendors to be around $800 billion in 2026 and will surpass $1 trillion in 2027. Fourth, the US Democratic Party will not sweep the midterm elections. Bank of America's June Fund Manager Survey (FMS) shows that the probability given by global investors for the Democratic Party to sweep both houses of Congress is only one-fourth, despite the prediction market Polymarket's related probability has risen to 45%. Four reverse trades, betting on consensus failure Hartnett believes that everyone is currently pricing in the "no landing" scenario, and once a consensus is broken, the market will face a drastic repricing. Based on this, he proposed four types of reverse trading strategies. Bet on "landing". In the situation where everyone is positioning for no slowdown in the economy, weak non-farm payrolls data would be enough to drive long-ignored long-term bonds (10-year government bonds), defensive sectors (such as essential consumer goods, the seven tech giants, the latter being essentially defensive monopoly businesses), and high-dividend stocks. Bet on "interest rate hike". Hartnett pointed out that the best corresponding trade for the Federal Reserve to raise interest rates before the midterm elections is to go long on the US dollar and bet on yield curve flattening (i.e. betting on an inverted yield curve). He especially pointed out a historically rare signal: the US CPI (4.2%) and unemployment rate (4.2%) are close to being equal, a situation that has only occurred in 1966, 1973, 1990, 2000, 2008, and 2021 over the past hundred years, and each of these years ended with a Fed rate hike and none were considered "good years" in Wall Street history. Bank of America predicts that from now until the end of the year, major central banks around the world are expected to have a total of 18 interest rate hikes and 9 interest rate cuts. Bet on "AI capital spending reduction". This is the most impactful unexpected scenario compared to market expectations. The corresponding trade is to buy software and the seven tech giants and short the Philadelphia Semiconductor Index. Hartnett believes the trigger will be: super-large-scale cloud vendors continue to have negative cash flow, their debt size has exceeded $208 billion, bond "vigilantes" may force them to issue stock, cut hiring to support expenses, and then be forced to cut capital spending. Bet on "Democratic Party sweep". With Trump's approval rating continuing to decline, if the Republican Party loses control of the Senate, it will lead to an event shock of "downward yield, downward dollar, downward stock market". Hartnett suggests that if Trump's support rate does not show a clear rebound after Labor Day in early September, one should buy gold in September to hedge against the top risks accumulated by Wall Street's "greedy" sentiment. Japanese bank stocks, the "canary" of global risks At the macro level, Hartnett views Japanese bank stocks as a key indicator to observe global risk appetite. In the past three years, with Japanese government bond yields soaring from 0.5% to 3%, Japanese bank stocks have risen three times in total. Hartnett points out that global bank stocks are overall breaking out, as this sector is one of the highest in adopting AI technology, and central banks around the world have a relatively mild policy stance. However, he warns that if Japanese government bond yields continue to rise and lead to weakness in Japanese bank stocks, this will be a "warning signal" of "global large-scale risk aversion sentiment". "25/25/25/25" combination annual return of 16% In terms of asset allocation, the full asset allocation plan proposed by Bank of America strategist Hartnett (25% in US stocks, US bonds, commodities, and cash each) has performed well this year, with an annualized return of 16%, achieving the best performance since 2021. In the current situation where the weight of US stocks is extremely concentrated on a few giants, the excellent performance of this portfolio strongly demonstrates the unique value of diversification and diversified investment. Hartnett pointed out that the team is currently strategically establishing long or short positions based on four "secular inflection points" from a long-term perspective. These four core investment themes focus on commodities, emerging markets, small-cap stocks, and consumer stocks that are about to be formally included in the core allocation. When evaluating market risk appetite, Hartnett provides a clear bull-bear boundary. As long as the "seven giant tech sisters" ETF (MAGS) can stabilize above the 200-day moving average support level (65 USD) and the forex market indicator Australian dollar against the Japanese yen remains above the 110 level, market funds will still tend to buy on dips or rotate between sectors, rather than withdrawing from risky assets. However, potential black swans are approaching. The real yield on 30-year US Treasury bonds has soared to its highest level since November 2008, causing severe tightening in the global financial environment. This high-interest rate environment will continue to exert pressure until the Federal Reserve is eventually forced to take action to actively prick the asset bubble created by AI speculation and suppress the inflation caused by the wealth effect. This article is reprinted from Wall Street Horizon, GMTEight Editor: Chen Yufeng.