Investment Newsletter – February 2025
Bank of America’s Michael Hartnett notes a striking divergence in the market, with U.S. equities, gold, and crypto reaching record highs while bonds remain deeply out of favor . Recent fund flow data shows $46.8 billion going into cash, $16.6 billion into bonds, $2.2 billion into crypto, a mere $0.1 billion into gold, and a $0.6 billion outflow from equities. Private client allocations further underscore the trend: of $3.9 trillion in AUM, 63.3% is in equities, 18.7% in bonds (lowest since mid-2022), 11.2% in cash, and just 0.2% in gold. Meanwhile, U.S. Treasury prices hover around 50% below their 2020 peaks, reflecting investor wariness toward government debt, a mindset Hartnett characterizes with themes like “Anything but Bonds,” “Anywhere but China,” and “All-In on AI,” all favoring U.S. outperformance. He expects this bias could shift if a second wave of inflation prompts further Federal Reserve rate hikes or if U.S. growth disappoints (e.g., via fiscal tightening or a credit event), potentially driving a pivot away from “U.S. exceptionalism” and toward the “BIG” trade in 2025: going long on Bonds, International stocks, and Gold.
Hartnett believes that Trump is unlikely to stoke inflation in the first half of 2025 through large tariffs or immigration cuts, but the more pressing concern, echoed by Steve Cohen, is a potential, unanticipated slowdown in growth. This could emerge from a weakening housing market, fading wealth and jobs tailwinds, persistent inflation that weighs on consumer confidence, and the onset of a U.S. government recession (particularly given that the 50% jump in nominal GDP over the past five years was fueled by a 65% surge in discretionary spending).
Hartnett ALSO notes that if U.S. tariffs on $1.4 trillion of imports from China, Mexico, and Canada had been enforced. He argues that the 2025 landscape is more vulnerable to a large-scale trade war than in 2018, when robust global manufacturing and low inflation provided a cushion. Despite a steady inflation backdrop and a lower relative weight of tech stocks, the trade environment is bifurcated into a strategic confrontation with China and several tactical, transactional disputes with other nations. With China’s reliance on U.S. exports having dropped from 7.2% of its GDP in 2007 to just 2.8% today, and given the high stakes on both sides, neither is likely to risk an all-out escalation, including a full-blown tech war . Hartnett warns that it would be a major political misstep for a Trump administration to trigger a second inflation surge, which could derail efforts to manage the broader economic challenges ahead.
Chinese authorities are quietly advising top AI entrepreneurs and researchers to limit U.S. travel to safeguard sensitive innovations, a reflection of Beijing’s emphasis on national security and technological self-reliance amid ongoing U.S. -China tensions. Despite these restrictions, investor sentiment toward China’s tech sector remains bullish. A softer stance from Trump on tariffs has buoyed the CNH, while the upcoming National People’s Congress on March 5 is anticipated to bring greater fiscal clarity. Moreover, breakthrough AI developments from firms like DeepSeek and Alibaba are bolstering the case for a re-rating of Chinese tech relative to its global peers. JPMorgan’s market intelligence team has accurately captured these dynamics, with the latest move higher in the sector underscoring both the resilience and the upside potential of China’s technology landscape.
