Bank of America has issued a clear signal: although its Bull & Bear Indicator sits in an extremely bullish zone (9.2), triggering a tactical sell signal, strategically investors should not retreat but rather rotate. The core logic is to "go long Detroit, short Davos"—meaning shifting from crowded large-cap stocks and technology shares to small- and mid-cap stocks and industrial companies.
According to Wind data, on January 22, Bank of America's star strategist Michael Hartnett noted in a recent report that the winners of the first half of the 2020s (U.S. tech stocks, gold) are giving way to the winners of the second half (emerging markets, small- and mid-cap stocks). Against the backdrop of soaring U.S. Treasury yields and a major bear market in bonds, capital is searching for "any asset but bonds." For investors, this means focusing on previously deeply undervalued asset classes, especially small and medium-sized enterprises that benefit from government intervention in cost control and re-industrialization.
Fund Flow Monitoring: Soaring Treasury Yields In the week ended January 22, 2026, global market fund flows showed significant volatility:
Bond markets: Despite rising yields, recorded inflows of $15.4 billion. Gold: Continued to attract strong interest, with inflows of $4.9 billion. U.S. stocks: Experienced outflows of $16.8 billion, the first in two weeks.
The prevailing market zeitgeist is that while Federal Reserve Chair nominations typically bring yield volatility (yields have risen within three months after all 7 nominations since 1970), the market believes the new Chair in 2026 will not allow 30-year Treasury yields to breach the 5% "risk-off" level, as quantitative easing (QE) and yield curve control (YCC) will intervene to "fix" prices.
The Theme for the Second Half of the 2020s: ABB (Anything But Bonds) Bank of America points out that the bear market in bonds has been exceptionally severe. Since the start of the 2020s, 30-year U.S. Treasury prices have fallen 50% from their peak, and Japanese Government Bonds (JGBs) have fallen 45%.
First-half script: The bond bear market fueled bull markets in U.S. tech stocks (the "Magnificent 7"), European/Japanese bank stocks, and gold. Second-half script: Bank of America believes emerging markets (EM) and small- and mid-cap stocks will become the new beneficiaries of the "ABB" strategy.
History Rhyming: This resembles the 1970s, when the end of the Bretton Woods system led to dollar devaluation. Initially, gold reigned supreme (1971-74), followed by small-cap stocks replacing gold as the best-performing asset in 1975-77. Bank of America specifically recommends GLD (gold), GNR (resources), EEM (emerging markets), MDY (mid-caps), and IJR (small-caps) as beneficiary assets for 2026.
Core Strategy: "Go Long Detroit, Short Davos" Bank of America is firmly bullish on the performance of U.S. small- and mid-cap stocks through 2027. This strategy is dubbed "go long Detroit (representing the real economy/SMEs), short Davos (representing the global elite/large corporations)." Four key pillars support this view:
Extreme Positioning Divergence: Since the start of the 2020s, U.S. large-cap stocks have seen $1.6 trillion in inflows, while small-cap stocks have suffered $6.1 billion in outflows. This massive disparity implies a significant contrarian trading opportunity. Extreme Undervaluation: Over the past century, only in 1956 and 1999 have the long-term returns of small-caps relative to large-caps been worse than they are now. Policy Shift: The Trump administration's goal of using QE/YCC to lower the "price of money" eliminates the tail risk of a sharp rise in bond yields. Political Intervention (The Invisible Hand Becomes a Visible Fist): Governments are actively intervening in the corporate sector to control prices. Examples include using tariffs in 2025 to reduce healthcare costs, and in 2026 pushing banks to lower credit card rates, restricting private equity from buying homes, and making tech companies pay for powering data centers. This suppression of energy, healthcare, and credit costs effectively compresses the profit margins of "big business" while favoring Main Street prosperity, manufacturing reshoring, and small- and medium-sized enterprises.
Global Macro: Yen Depreciation and the Rise of Emerging Markets On a macro level, Japan's currency depreciation is triggering significant capital outflows.
Yen-Denominated Silver: Prices have hit a record high, surpassing the 1980 peak, signaling the impact of currency depreciation.
Capital Outflows: Weak Asian currencies are stimulating capital flows into European and U.S. assets. For instance, South Korean retail investors have poured nearly $100 billion into U.S. stocks since 2019. Emerging Market Bull Market: The long-term bull market in international equities is entering its second year. Emerging market currency strength, driven by strong commodity prices (fueled by AI infrastructure build-out), will lower EM bond yields, thereby propelling EM stocks into a new relative bull market. Bank of America is particularly optimistic on China, noting its 3% weighting in the MSCI ACWI index is too low compared to the U.S.'s 64%, and the consumption share of GDP is expected to rebound from a low of 40%.
Gold and Market Signals Amid a new world order, currency debasement, populism, and fiscal excess, gold remains a highly attractive hedge. Historically, the four gold bull markets over the past 60 years have seen average gains of around 300%, implying a potential peak price exceeding $6,000. The Bull & Bear Indicator currently reads 9.2, placing it in the "extremely bullish" zone (a reading above 8.0 is a sell signal). This is primarily influenced by large outflows from equity and emerging market ETFs, offsetting the positive signal from cash levels being at a historical low (3.2%). This suggests short-term market sentiment is overheated, warranting caution for a potential pullback. However, this is seen more as an opportunity for rotation rather than a signal to exit the market entirely.
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