Bank of America's Hartnett, who accurately predicted the sharp sell-off: The "sell signal" has ended, and whether investors can return to tech stocks in mid-November hinges on semiconductor prices.

BlockBeats news, October 18 – Bank of America Securities strategist Michael Hartnett said in the latest Flow Show report that the BofA Bull & Bear Indicator fell from 8.1 to 7.4, breaking below the 8.0 threshold and ending the sell signal triggered on May 26. However, he stressed that the end of the sell signal does not equal the emergence of a buy signal, and tactically he remains defensive for now, refraining from adding to tech stocks.

The preconditions Hartnett listed for returning to risk assets include: the Fed raising rates on October 28 to restore credibility, and easing concerns over AI financing—neither of which has materialized. Meanwhile, market expectations for a Fed rate hike in October have dropped from over 50% to 14%, and the AI credit market has just seen its worst week of the year, with CoreWeave bonds falling into distressed territory and 5-year credit default swap (CDS) spreads implying a default probability of about 63%.

He noted that the cooling in market sentiment has not yet been accompanied by sufficient withdrawals. The latest weekly data show net inflows of $64.4 billion into equity funds and net outflows of $53.1 billion from cash funds. Equity allocation among BofA private clients reached a record 66.4%, while cash allocation fell to a historic low of 9.3%; the October fund manager survey showed that investors' overweight in tech stocks is the highest since August 2020.

For the outlook, Hartnett sees semiconductor prices as the key variable. If chip prices continue to rise, he expects investors to return to tech stocks in mid-November and to reverse the "short tech, long bonds" positioning heading into 2027. Conversely, if semiconductor prices fall back, he believes this would mean further tightening in AI credit and peak capex growth, with bonds likely to outperform, and the core driver of asset returns in 2027 shifting from capital appreciation to income.

On allocation, Hartnett chooses to add to "peak yield" beneficiaries such as small caps, REITs, and consumer discretionary, while maintaining a long-term overweight in gold, commodities, and emerging markets.