BofA: Funds Still Flow to Tech Stocks. Why Maintain Tactical Defense Until Mid-November?
Tech funds attracted 18.8 billion dollars in a single week, but market breadth weakened and AI financing costs rose. BofA maintains a short-term defensive stance while watching deflationary pressure in China and shifting toward US Treasuries and assets that benefit when yields peak.
Original source：BofA Global ResearchFirst published on Unhidea：Original source date：
Key takeaway
BofA believes investor enthusiasm has not yet cooled sufficiently and that deflation in China and AI financing pressure could hurt earnings. It therefore remains defensive in the short term, with its contrarian positioning leaning toward bonds and assets that benefit when yields peak.
Money Is Still Buying. Why Is BofA Staying Defensive?
In the week through 21 October, global equity funds received net inflows of 55.6 billion dollars, including 18.8 billion dollars for tech funds, the highest since July. Meanwhile, BofA's October fund manager survey showed that the overweight in tech stocks was the largest since August 2020; positions had not cooled significantly during the pullback.
BofA's Bull & Bear Indicator fell from 7.4 to 7.2, remaining in neutral territory: strong equity inflows offset some of the effects of deteriorating market breadth and widening high-yield bond spreads. A net approximately 30% of global stock indices fell below their 50-day and 200-day moving averages, still far from the 88% required by its contrarian buy rule.
BofA therefore maintains its tactical risk-off stance until mid-November, expecting equities, the dollar and US Treasury yields to decline together, with the 30-year Treasury yield heading toward 5% and the dollar index falling below 100. Its view is that current investor enthusiasm has yet to align with potential earnings pressure.
Why Could Changes in China Affect Global Earnings?
The CSI 300 has fallen 20% since June, and the technology sector has dropped 41%； Chinese government bond yields have fallen to a record low of 1.6%, while the renminbi has risen to a four-year high against the dollar. BofA sees the combination of falling stock prices and yields and a stronger currency as a deflationary signal, reflecting continued pressure on real estate and weak willingness to buy among consumers and investors.
Low yields have yet to reverse the decline in property investment, while China's exports grew 36% year on year and high-tech exports grew 63%. BofA worries that China could transmit deflationary pressure abroad through exports, thereby threatening global earnings per share.
China equity funds nevertheless received net inflows of 17 billion dollars during the week, the highest since July. Inflows and weak domestic demand coexist, reflecting changes at different levels.
How Does AI Pressure Travel From the Bond Market to Earnings?
Spreads on 10- to 30-year bonds issued by AI hyperscalers are around 130 basis points. BofA lists a break above 200 basis points as a near-term downside scenario, in which concerns about a credit event could prompt investors to deleverage.
The transmission chain runs from tighter financing to reduced capital expenditure and then to growth expectations. BofA believes the forecast of 1.2 trillion dollars in AI hyperscaler capital expenditure in 2027 is at risk of cuts; expectations for global technology earnings per share to grow 43% in 2027 would also be affected, even though that growth rate is already below 2026's 92%.
BofA does not rule out gains: the market consensus expects US Treasury yields to fall 40 basis points and S&P 500 earnings per share to grow 15% in 2027, which could support a broadening rally into small- and mid-cap stocks. But 50% of survey respondents expect a “no landing,” 40% a soft landing and only 6% a hard landing; BofA believes confidence in optimistic scenarios is excessive.
Where Does BofA See Opportunities While Staying Defensive?
From a long-term contrarian perspective, BofA favors increasing exposure to US Treasuries because their rolling returns over the past decade are near their worst levels in a century. It is also adding to areas that benefit when yields peak, including small-cap stocks, REITs, utilities and consumer discretionary.
Utilities and consumer funds recorded weekly outflows of 1.6 billion and 2.1 billion dollars respectively, each their second-largest weekly outflow on record, providing sentiment support for the contrarian view. But US small-cap funds saw outflows of 7.5 billion dollars in the same week, and these areas have yet to attract broad investor flows.
Key turning points for the short-term defensive stance include French bonds finding a floor, or AI capital expenditure cuts or large-scale equity financing causing related bond spreads to peak. Another upside path is a peace agreement driving oil prices down by 10 to 20 dollars per barrel, easing current pressure.
