BofA: Developed Market Central Banks Turn Net Hawkish, Bearish on Equities
Claire Weston
Bank of America says developed-market central banks have tipped into net rate-hiking territory for the first time in 2026, with the Fed expected to raise rates three times for a cumulative 75 basis points; tighter liquidity is structurally bearish for equities, but capital is already rotating from AI tech into value sectors.
Central banks are net hikers — what does that mean?
BofA economists note that 2026 marks the first time developed-market central banks are net rate hikers — more are tightening than easing.
The Fed alone is expected to hike three times this year, totaling 75 basis points. This means → the era of cheap money is officially over, and corporate borrowing costs will keep climbing.
Historical data show that when M2 money supply — the total amount of money circulating in the economy — falls below its long-run average, the S&P 500's typical one-year return is 7%, roughly 5 percentage points below normal.
The economy is still expanding — so why worry?
BofA's own indicators remain expansionary: manufacturing PMI new orders at 55.8 (implying U.S. GDP growth of about 3.3%); South Korean exports up 71% year-on-year.
"Hard data" activity indicators have hit their highest since 2022; "soft data" sentiment measures are improving month by month.
In plain terms = the economy itself is fine. The problem is the central banks — the stronger the economy, the more confident they are to hike, and the harder rates press down. This is the classic "good news is bad news" dynamic.
Big Tech spent $234 billion — why hasn't the stock moved?
The "Magnificent Seven" tech giants have spent a combined $234 billion in capex this year, yet their share prices are up only about 0.5%. This means → the market is no longer rewarding the "spend big on AI" narrative and is demanding real returns.
BofA expects these companies' free cash flow — revenue minus spending — to turn negative within twelve months, a first since at least 2007.
Telecom, tech, semis, and other growth names had rallied 10%–40% earlier this year but pulled back in June. This reflects capital voting with its feet — retreating from the AI trade.
Where is the money going — the "away from AI" rotation?
Financials were down 12% year-to-date at one point but have since turned positive. Healthcare swung from a 7% drawdown to a 7% gain.
BofA sees the "away from AI" rotation continuing — capital flowing out of high-multiple growth names and into previously neglected value sectors.
Put simply = the market's logic has shifted. Rather than betting on how much further the AI story can run, investors are buying undervalued sectors with solid fundamentals.
U.S. households sit on $21 trillion in cash — will they deploy it?
U.S. household cash and equivalents total $21 trillion, roughly 33% above the pre-pandemic trend.
During the 2022–2023 hiking cycle, short-term Treasuries offered positive after-tax real yields, making cash a rational hold. But the after-tax real yield has now dropped to about −1%. This means → holding cash is now a losing proposition every single day.
BofA argues that the cost of sitting on a depreciating asset is rising in a strong economy. Whether this $21 trillion accelerates into equities and credit is the key variable that will test the rotation thesis.
Content is for reference only, not financial advice.