Bank of America: To address geopolitics, "trade oil, hold gold"; for U.S. stocks to emerge from sluggishness, "two major external shocks" are needed.

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According to Michael Hartnett, Chief Strategist at Bank of America, the market logic in 2026 has fundamentally shifted: there is intense differentiation within the AI concept, and capital flows are spilling from the United States to Japan and South Korea.

Facing the fog of geopolitics and a highly volatile U.S. stock market, Hartnett believes investors should "trade oil" in the short term and "hold gold" in the mid-term. For U.S. stocks to break out of their current state of "extreme bullishness yet sluggishness," two major "external shocks" are urgently needed: a Middle Eastern oil price crash or an easing of U.S.-China trade tensions.

Drastic Changes in Market Styles?

According to Michael Hartnett, Chief Strategist at Bank of America (BofA), the market logic in 2026 is completely different from the previous two years.

If 2024 and 2025 were a one-man show for "AI frontrunners," then 2026 may see a drastic change in market styles. Hartnett believes the market is abandoning companies with massive capital expenditures, switching to embrace "builders" of infrastructure:

The market is abandoning those with huge capital expenditures ("spenders" like the Tech Seven Mag7), and embracing the "builders" in infrastructure (such as semiconductors and raw materials); funds are also withdrawing from the "disrupted" (software stocks) and flowing to the "appliers" of AI technology (bank stocks).

Of course, intense sector rotation brings risks as well. Currently, the technology, telecom, and financial sectors together account for 56% of the S&P 500 index weight. If the market cap evaporation of leading decliners outpaces the lifts of leading gainers, the market faces crash risks.

Rules for Geopolitical Trading: Short-term Oil Dominates, Mid-term Gold Wins

On oil, gold, and geopolitical shocks, Hartnett believes oil will be the best performing asset in 2026, influenced by U.S.-Iran relations and geopolitical factors.

But that does not mean investors can blindly hold oil.

Based on 90 years of historical data, BofA offered the following reference: In the first three months after a geopolitical shock, oil is the absolute winner, averaging an 18% gain, outperforming gold (+6%) and U.S. stocks (+4%). However, when the period extends to six months, the situation reverses—gold continues to outperform, with average gains expanding to 19%, U.S. stocks stagnate, and oil gives back all its gains.

Therefore, Hartnett's strategic maxim is concise: "Use geopolitical turbulence = Trade Oil, Own Gold."

The former is a short-term tactical play, the latter is a mid-term strategic allocation.

Breaking the Stalemate: U.S. Stocks Urgently Need Two Major "External Shocks"

Returning to the broader market, current investors are caught in a "maze" of logical divisions. On one hand, extremely bullish positions and booming profit expectations are signaling "sell"; on the other hand, tax incentives and rate cut expectations imply "buy on dips."

This contradiction has led the market into a chaotic, highly volatile state.

Hartnett believes for risk assets to break further above current highs, endogenous momentum alone is insufficient. Two exogenous "shocks" are needed to change the fundamental narrative.

The first is a regime change in the Middle East to ensure adequate future oil supply, leading to an oil price crash and fundamentally easing inflationary pressures.

The second is a possible U.S.-China trade agreement in April. He believes the Trump administration urgently needs to cut tariffs to ease inflation and boost approval ratings, which have fallen to new lows due to dissatisfaction with prices—currently just 42%, with support on inflation handling even lower at 35%.

Capital Flow Warning

Deeper changes are happening in the direction of capital flows, as the notion of "American exceptionalism" seems to be declining.

Hartnett forecasts that for every $100 flowing into global equity funds in 2026, U.S. stocks will only get $26, a record low share since 2020, sharply contrasting with the $92 peak in 2022.

Data shows international equity funds recorded a record net inflow over four weeks ($64.6 billion), primarily flowing to South Korea (memory chip concept) and Japan (re-inflation narrative). South Korea's stock market saw the largest six-week net inflow in history at $17.7 billion.

In the report's conclusion, Hartnett again cited BofA's famous "Bull & Bear Indicator." The current reading is 9.4, in the "extreme bull market" range, just below the historical extreme of 9.5.

Historical backtests show that over the past 25 years, this indicator broke above 9.5 only three times, and after such extreme readings, the market usually saw significant corrections in the following three months, with the Nasdaq averaging an 8.6% decline.

Risk Warning and DisclaimerThe market has risks; investment requires caution. This article does not constitute personal investment advice, nor does it take into account the individual investment goals, financial conditions, or needs of any specific user. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Investments made based on this are the responsibility of the user. ```