Hartnett predicts that going long on commodities will be the best "hot trade" in 2026. Under the new paradigm of "fiscal populism + deglobalization," oil and energy, which have been neglected for a long time, are emerging as the top contrarian sectors.
By contrast, the bond market faces pressure due to historical patterns. Data shows that yields inevitably rise in the three months following the nomination of a Federal Reserve Chair, with an average increase of 49 to 65 basis points.
Michael Hartnett, Chief Investment Strategist at Bank of America, has forecasted that going long on commodities will become the best trading theme in 2026, with all commodity charts eventually showing an upward trend akin to gold. This assessment is based on a paradigm shift in the global economy from the post-financial crisis model of "monetary easing + fiscal tightening" to a post-pandemic era of "fiscal easing + de-globalization."
In his latest Flow Show report, Hartnett explained that the Trump administration will adopt a "hot" economic policy, and oil prices will rebound following a resolution to the Russia-Ukraine conflict, collectively driving strength in the commodities sector.
"Trump's adoption of a hot economic policy and the rebound in oil after the resolution of the Russia-Ukraine issue means that soon all commodity charts will look like gold; what Latin American stock markets are telling you."
He emphasized that natural resources, metals, and Latin American stock markets (which have surged 56% year-to-date) are all breaking out comprehensively. In the long-neglected commodities space, Hartnett is particularly bullish on oil and the energy sector, viewing it as the best contrarian investment opportunity for 2026.
He also noted that while investors currently hold an optimistic view towards risk assets, the bond market is keeping a close watch on "hot trades," especially given historical patterns indicating that U.S. Treasury yields tend to rise following the announcement of a new Federal Reserve Chair nomination. Additionally, the report highlighted that,
The core logic behind this assessment lies in the shift in economic policy paradigms: excessive monetary easing combined with fiscal tightening in the aftermath of the global financial crisis caused bonds to outperform commodities during an era of secular stagnation; whereas post-pandemic excessive fiscal easing coupled with the end of globalization has positioned commodities to outperform bonds during the populist and inflationary growth era of the 2020s.
Commodities Face Structural Opportunities
The report pointed out that the paradigm shift in global economic policies has created structural opportunities for commodities. The combination of excessive monetary easing and fiscal tightening in the decade following the financial crisis allowed bonds to significantly outperform commodities during an era of long-term stagnation. However, the COVID-19 pandemic has changed this dynamic.
The post-pandemic policy mix has been characterized by excessive fiscal easing and relatively moderate monetary easing, coupled with the end of globalization. This has caused commodities to outperform bonds in the politically populist and inflationary growth environment of the 2020s.
Natural resources, metals, and Latin American stock markets have all shown technical breakouts, with the latter rising 56% year-to-date.
Hartnett emphasized that among all commodity sub-sectors, the long-despised oil and energy sectors are undoubtedly the best contrarian investment opportunities for a "hot trade." This assessment is based on the convergence of factors including Trump's economic policies, geopolitical shifts, and changes in the currency landscape.
Historical Pattern: Yields Inevitably Rise After Fed Chair Nomination
Despite Hartnett’s bullishness on commodities, he remains cautious about the bond market. Bank of America had tactically gone long zero-coupon bonds, citing anticipated Fed rate cuts, Trump's intervention to suppress inflation for political support, and weakening labor market conditions. Data shows U.S. private sector job growth at its weakest since October 2020, with youth unemployment rising from 5.5% in 2023 to 9.2%.
However, the bank plans to unwind this tactical long-duration bond position before May 15 next year (when the term of the next Fed Chair begins). Reasons include rising bond yields in Japan and China (the long-term "floor" for global yields), benefiting Japanese banks, and market expectations that a second major central bank (Australia) will raise rates by 2026.
Historical data shows that yields rose each time during the three months following the seven Federal Reserve Chair nominations (Burns, Miller, Volcker, Greenspan, Bernanke, Yellen, Powell) since 1970,$U.S. 2-Year Treasury Notes Yield (US2Y.BD)$with an average increase of 65 basis points.$U.S. 10-Year Treasury Notes Yield (US10Y.BD)$An average increase of 49 basis points.
Notably, from Nixon's nomination of Arthur Burns in October 1969 to the beginning of his term in February 1970,$U.S. 10-Year Treasury Notes Yield (US10Y.BD)$An increase of 100 basis points,$Dow Jones Industrial Average (.DJI.US)$A decline of 11%.
Hartnett pointed out that bonds do not favor "overheated" economic policies, and the bond market is closely monitoring "hot trades."
The biggest threat to the current market is that all potential gains in equities and credit markets in 2026 may be concentrated in the first half of the year; the only factor that could derail a Santa Claus rally is a 'dovish' Federal Reserve rate cut leading to a sell-off in long-term bonds.
Seeking Opportunities Amid Stock Market Divergence
Compared with the overall pressure on the bond market, the stock market presents a more complex picture of divergence.
Hartnett believes that the peak of liquidity corresponds to the trough of credit spreads. Bond vigilantes are becoming new regulators of AI capital expenditure, demanding slower growth as hyperscale cloud providers’ capital spending as a percentage of cash rises from 50% (USD 240 billion) in 2024 to 80% (USD 540 billion) in 2026.
In the AI sector, Hartnett favors adopters of AI technology over spenders. To address potential intervention by the Trump administration aimed at preventing inflation from reaching 4% and unemployment from hitting 5%, the bank’s strategists are optimistic about the performance of mid-cap stocks in 2026.
He noted that the market capitalization of the tech giants collectively referred to as 'Mag 7' now exceeds the combined value of both the small-cap 600 Index and the mid-cap 400 Index, the latter two being relatively undervalued.
In terms of specific sectors, Hartnett believes that the 'Main Street' cyclical sectors (homebuilders, retail, paper, transportation, real estate investment trusts) have the best relative upside potential. This assessment is based on the possible economic stimulus policies under the Trump administration and support for the domestic economy.
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