Bank of America's Hartnett: Rate cuts are unlikely to shift funds to US stocks, whether a "soft landing" can determine whether the market avoids a crash

After Powell hinted at an upcoming rate cut, the economic outlook has become a decisive factor in the trend of the US stock market.

After the annual non-farm employment figure was significantly revised down by 810,000 people on Wednesday, Michael Hartnett, a renowned strategist at Bank of America, commented in his latest Flow Show note that this indicates a sluggish labor market, confirming his previous view that "lower bond yields correctly indicate macroeconomic weakness."

On Friday, Powell sent a dovish signal at the Jackson Hole meeting. Does this mean a reduced risk of a hard landing?

Hartnett's answer is negative. He believes that the Fed's rate cut will be due to an economic recession rather than a "soft landing" scenario, which historically often leads to a stock market crash.

The risk of a hard landing still exists, and a rate cut may not necessarily be good for the stock market

Hartnett believes that the current situation of rising inflation and a weak job market is unlikely to bring about the prospect of a "soft landing."

Related data also shows that the wage levels of white-collar positions in the United States have remained flat compared to last year, overall retail sales have grown by zero since the beginning of the year, and 11% of credit card delinquencies exceed 90 days, all indicating economic weakness.

Therefore, Hartnett still holds a bullish view on US bonds, especially considering that being long on 30-year US bonds is the best hedge against the rising risk of a hard landing in the fourth quarter.

Another factor exacerbating the risk of a hard landing is that global corporate earnings are about to face a "Wile E Coyote" moment.

Considering the decline in global manufacturing PMI levels, the long-term inversion of the US bond yield curve, etc., Hartnett predicts that the year-on-year growth rate of global corporate earnings will drop from 11% in July to 5% in December, with July being the turning point.

Therefore, Powell's dovish turn may not necessarily be as positive for the stock market as expected.

According to Hartnett's statistics, Powell has held 6 speeches at the Jackson Hole annual meeting, 5 of which have led to an average 7.5% decline in the S&P in the following 3 months.

Hartnett predicts that the market will not see a large influx of funds before the first rate cut:

"Rate cuts are unlikely to be the catalyst for $62 billion in money market fund inflows and $25 billion in private equity fund inflows."

Furthermore, the bank's client data shows that individual clients' stock allocations are close to a historical high of 62%, while S&P cash balances have dropped to only 8.8% of assets, indicating limited room for further buying by individual investors and share buybacks by companies, sending a bearish signal

In the end, Hartnett pointed out that gold is the only asset that has outperformed US technology stocks this year, and it is one of the assets with the lowest correlation to stocks among all asset classes, accounting for 16.1% of the total, surpassing the euro to become the world's second largest reserve asset.

Hartnett stated that the surge in gold prices this year was not driven by fund inflows, but mainly by large-scale purchases by central banks.