- Stocks look poised for gains amid a fresh Fed easing cycle, BofA's Michael Hartnett says.
- But that means investors once again exposed to risks of a tech bubble inflating anew.
- Hartnett says investors should allocate to bonds and gold to hedge bubble risk.
With further easing from the Federal Reserve on the horizon, the stage is set for a fresh stock market rally.
That sounds like good news for investors, but with a new Fed easing cycle comes renewed risk of a bubble in parts of the market, Bank of America strategist Michael Hartnett said.
On Wednesday, the central bank cut the fed funds rate by 50 basis points. The market is now pricing in 250 basis points through this year and next, which should help drive 18% earnings growth for the S&P 500 by the end of 2025, according to consensus views.
The growth doesn't "get much better than that for risk," Hartnett said. But it means investors will have to chase the stock market surge as bubble risks bounce back, he added.
Hartnett has previously warned of the potential for a tech bubble as investment in AI has soared. In February, he said a "baby bubble" in AI is "growing up" and could drive market gains if monetary policy eases.
That time has now come, with tech stocks leading indexes to rally to record highs on Thursday, a day after the Fed's rate cut. The tech-heavy Nasdaq 100 soared 2.6% as shares of Nvidia, Broadcom, ASML, and Meta all climbed by about 4%.
Amid further AI investment and easing policy, Hartnett says the best way to position portfolios is with allocations to bonds and gold, which hedge against growth and inflation risks.
"Use risk rally to buy dips in bonds & gold as recession & inflation reacceleration 'tails' too unfashionable," he wrote.
Hartnett has noted his bullish view on bonds before, saying back in May that he saw outsize growths for fixed income in the second half of the year. At the time, he said the 30-year Treasury was the best hedge amid weak growth.