With the recent market volatility in American financial markets and weak economic data, a key issue has arisen in the mind of Michael Hartnett, Chief Strategist at Bank of America.

Hartnett, who is considered one of Wall Street's most accurate analysts, wrote in the latest Flow Show note that due to "long-term high real interest rates that are slowly and deeply damaging U.S. consumers and labor markets," global rate cuts are no longer a question of "if" or "when," but a question of whether they will be effective.

One compelling piece of evidence is the sudden and unprecedented drop in credit card debt last week, which may be due to the Fed's decision not to cut rates.

In the second quarter, the average interest rate on interest-bearing credit card accounts reached a historic high of 22.76%, burdening ordinary households with unprecedented high-rate debt.

At the same time, small businesses, an important part of the country's economic vitality, have their borrowing costs directly affected by benchmark interest rates. Currently, the real benchmark interest rate in the United States is as high as 6.5%, the highest level this century. This not only increases the operating costs of small businesses, but also may inhibit their expansion and innovation capabilities.

As recession warnings continue to sound, Hartnett points out that the urgency of rate cuts is growing, but the key question is whether the rate cuts will be substantial enough to have a substantive impact. Here, he suggests that a significant rate cut is necessary for it to be effective.

Key indicators suggest that the market remains optimistic.

Despite experiencing some volatility, investor consensus still leans towards the expected soft landing brought by the Fed's rate cuts, which supports the stock market. However, according to Hartnett, some key market indicators have yet to break through the technical levels that will cause Wall Street to shift from a soft-landing narrative to a hard-landing one.

Hartnett believes that if the market's key technical levels are breached, such as a fall in the 30-year Treasury bond yield to 4%, a high-yield CDX spread of 400 basis points, or the S&P 500 falling below 5050 points, Wall Street's narrative may shift from a soft landing to a hard landing.

He emphasizes the importance of the 200-day moving average of the SOX index and the XLK index for large technology stocks. If certain key technical levels or psychological barriers are breached, market participants (especially traders) may change their trading strategies and target prices, predicting the market to fall 10% from its current level, reaching or approaching the highest point in 2021.

Although the market sentiment still leans towards the expected soft landing brought by the rate cuts, Hartnett believes that it will take worse economic data and/or market volatility to break this consensus. This consensus is:

Fed rate cut → Soft landing probability exceeds 75% → stocks > bonds, cyclical stocks > defensive stocks, large-cap tech stocks > small-cap stocks, USA > other regions.

Hartnett recommends paying attention to the housing and small business confidence, and is not bullish on AI in the second half of the year.

Aside from emotion, Hartnett also elaborated on his personal views on policy and profit. He wrote that the soft landing is contingent on signs of rate cuts stimulating market sentiment and household spending in the second half of the year, but biotechnology (the longest-term stock) "is not doing well," and non-essential retail stocks (at a relative low point in 12 years) have not yet been boosted.

Finally, Hartnett believes that if rate cuts can boost consumer confidence and spending, the housing market and small business confidence will be key indicators to watch:

Housing (mortgage purchase applications are approaching their lowest level since 1995, and refinancing is at its lowest level since 2000), many millennials' parents have to wait years to buy a house...if they don't buy a house now, there are significant concerns about the labor market.

Small business confidence is being suppressed by high financing costs (as well as taxes/regulations): if the small business confidence index from NFIB, which will be released next Tuesday, rises above 98 from the previous value of 92 (the 50-year average), this will be a significant bullish signal...conversely if it falls below 98.

Regarding the AI sector, Hartnett is still in the "sell" camp, expecting AI stocks to be dormant in the second half of the year until earnings per share growth becomes more apparent.

In the current economic environment, Hartnett believes that investors should focus on assets that can perform better at lower yields, such as government bonds, real estate investment trusts, small-cap stocks, and some struggling emerging markets like Brazil (for weak USD investments).

He also believes that there are huge opportunities in the real estate markets of the United Kingdom, Canada, Australia, New Zealand, and Sweden. All of these markets are primarily based on floating-rate mortgages, with transmission mechanisms much faster than those of the United States. At the same time, he also warns investors to be cautious of global retail stocks that may be severely affected by a hard landing.

Editor/ping