BofA's Hartnett: Strong dollar hits global liquidity, risk assets remain difficult to enter for now, turning point postponed to next spring

Title context: BofA's Hartnett: Strong dollar hits global liquidity, risk assets remain difficult to enter for now, turning point postponed to next spring Text: BofA Securities Chief Investment Strategist Michael Hartnett maintains a risk-off stance and has substantially pushed back the previously set entry window. A strong dollar, high oil prices, and persistently elevated inflation together form a triple obstacle, causing all the trigger conditions he had previously set for a year-end rally to fail. The dollar index closed at 103.42 on Friday, a new high for the year. Hartnett characterizes it as the "wrecking ball" for global liquiditya persistently strengthening dollar combined with gold falling below $4,000 means, in his analytical framework, that global liquidity is contracting. Against this backdrop, he postpones the end of the global rate-hiking cycle to the Fed's April meeting next year and extends his bearish stance on risk assets until after the dollar peaks next spring. In terms of market impact, this round of dollar strength has already dealt a clear blow to multiple asset classes: gold's year-to-date decline has widened to 10.4%, bitcoin is down 18.9%, government bonds are down 3.6% year-to-date, and emerging market bonds saw a single-week outflow of US$1.5 billion. Meanwhile, governments across Asia have successively stepped in to support their markets, and combined with nearly US$100 billion per week of inflows into global equity funds, stocks have remained resilient despite multiple negative factors. Hartnett's conclusion: the current market is "too expensive to short, and has too much support to short," and risk assets are neither worth chasing higher nor easy to enter and position in for now. Dollar becomes the "wrecking ball," global liquidity contracts across the board Dollar strength is the most central market variable this week. After rising for four consecutive trading days, the dollar index closed at a new year-to-date high of 103.42 on Friday; the yen touched the 160 mark, triggering verbal intervention from Tokyo authorities; gold fell 4.7% for the week to about $3,874, closing below $4,000 for the first time in months; and bitcoin slid below $70,000. Hartnett's logic is simple and direct: a surging dollar plus gold falling below $4,000 equates to a signal of global liquidity withdrawal. He had already used this as his benchmark when he advised clients on October 3 to start adding bonds, explicitly stating that a risk-off stance should be maintained until the dollar peaks. Six weeks later, instead of falling, the dollar has risen, and he now postpones his expected dollar peak to February to March next year. This judgment aligns closely with the forecasts of Goldman Sachs' FX team. According to Bloomberg, Goldman strategists Kamakshya Trivedi and Michael Cahill expect in their 2027 outlook that EUR/USD will fall to 1.08 within three months and then rebound to 1.15 by the end of 2027; the trade-weighted dollar is currently about 13% overvalued relative to its average. Both institutions believe the dollar's destructive move will come before any easing. All three entry conditions fail, turning point pushed to next spring Hartnett set three preconditions for turning risk-on: oil prices (WTI) falling below $70, the 10-year U.S. Treasury yield dropping below 4.5%, and the dollar beginning to decline. At Friday's close, none of the three conditions had been met. On oil, WTI needs to fall another roughly 21% to reach the $70 threshold, and that threshold itself has already been lowered from $80 a week earlier. Brent crude briefly fell below $90 this week but then rebounded on geopolitical remarks, with WTI ending the week around $89. On Treasury yields, the 10-year U.S. Treasury yield closed at 5.15% last Friday, up about 28 basis points for the week and just shy of a multi-year high; the three-year, 10-year, and 30-year auctions all showed yield tailing. Achieving a 65-basis-point decline in yields is extremely difficult against the backdrop of the Fed discussing whether to raise rates by 25 or 50 basis points in December. On the dollar, the current trend is the exact opposite of the entry conditiona new year-to-date high, with the peak expectation pushed to February to March next year. Meanwhile, the inflation situation continues to exert pressure. Fed Governor Waller signaled a 50-basis-point rate hike in December, Goldman Sachs has incorporated a March rate hike into its baseline forecast, and the October NFIB survey showed the share of small businesses planning to raise prices jumped to the highest since July 2022; historical data show this is highly correlated with inflation of at least 3% to 4%. Hartnett also specifically noted that the last time the Fed's 2% inflation target was met was in February 2021, 67 months ago. U.S. household wealth effect suppresses saving willingness, consumption resilience makes recession hard to call Hartnett poses the first core question to the market: with U.S. household equity wealth at an all-time high, why save? Data show that U.S. household equity wealth shrank by about US$3 trillion over the past month, but is still up about US$9 trillion year-to-date in 2026, and has accumulated an increase of US$19 trillion since Trump took office in January 2025, reaching a total of US$74 trillion. BofA derived these estimates by mapping its own private client holdings data against Fed household data. Hartnett's logic is concise: consumption accounts for 70% of U.S. GDP, wealthy groups with large equity holdings dominate consumer behavior, and they have never been richer. Against this backdrop, a recession is hard to form. It is worth noting that this "K-shaped" wealth pattern also breeds structural risks. Total U.S. consumer debt has also reached a record US$19.1 trillion, in sharp contrast to the US$19 trillion increase in wealth that the stock market has delivered to equity holders. Meanwhile, the equity allocation ratio of BofA private clients has fallen to 65.2%, a seven-month low, indicating that the wealthy are quietly reducing positions. Hartnett himself acknowledges that the fastest way to end this inflationary K-shaped boom is widening credit spreads and a stock market decline. "Boom" expectations are the last line of defense Hartnett points out that in May this year, market consensus collectively bet on "no landing, no rate hikes, no cuts to AI capex, no Democratic sweep," and nearly all four missed. The last remaining bullish belief in the market is the expectation of a "boom"namely 5% to 6% nominal GDP growth in 2027 and S&P 500 earnings growth exceeding 15% to 18%. He believes this expectation carries downside risk. Goldman Sachs Chief U.S. Equity Strategist Peter Oppenheimer forecasts in his 2027 outlook that S&P 500 earnings growth next year will be 11%, far below the 18% market consensus. At the current price-to-earnings ratio of about 19.5x, this gap corresponds to an index level of about 7,100 points, which happens to fall near the 7,000-point bear-market trigger range set by Hartnett. Goldman itself still maintains an 8,700-point target, but that requires earnings delivery and further valuation expansion, and the current 10-year Treasury yield of 5.15% clearly constrains this. Hartnett views BofA's November Global Fund Manager Survey, to be released on November 17, as a key observation window: if "boom" expectations fall sharply and the cash ratio rises above 4.2%, then sentiment will no longer be an obstacle to buying; if "boom" expectations remain high while the cash ratio falls below 3.7%, then the market has not yet formed enough panic and still does not meet entry conditions. Hartnett has set a clear two-way scenario framework for the S&P 500. The S&P 500 currently closed at 7,562 points, right in the middle of the two trigger points. If the index breaks above 8,000 points, the DRIVE lies in sustained dip-buying inflows, the "stocks over bonds" signal conveyed by the equal-weight S&P 500 returning to historical highs, and the technical support of junk bonds, the S&P 500 index, brokerage stocks, and TSMC all holding their 200-day moving averages. He also views the November 18 APEC summit in Shenzhen as a potential catalyst, believing that a meeting of the leaders of China, the U.S., and Russia could confirm an oil price peak. If the index falls below 7,000 points, the core risks come from a liquidity shortage triggered by a sharp dollar rally and policy errors from central banks continuing to raise rates amid an economic slowdown. The most vulnerable assets include high-yield bonds, U.S. and emerging market equities, the energy and healthcare sectors, and mega-cap consumer stocks. If his risk-off judgment is proven wrong, the assets most likely to rise sharply over the next eight weeks include gold, investment-grade technology bonds, Japanese and European equities benefiting from a strong dollar and low oil prices, Chinese tech stocks, small- and mid-cap stocks, semiconductors, consumer discretionary, and homebuilder sectors. This article is reprinted from "Wallstreetcn," author: Bao Yilong; GMTEight editor: Yan Wencai.