Bank of America strategists: This year, the performance of "peace trades" has outperformed "conflict trades," and investors need to closely monitor three key indicators.

On May 19, Bank of America strategist Michael Hartnett's first half of his prediction of "buy the rumors, sell the facts" came true: last Friday he predicted that the S&P 500 would soar after the trade deal framework was released, and then the index soared by 5%. As markets fluctuate amid tariff headlines (or soar day after day), Harnett has set his sights on the "next big opportunity." By analyzing the best and worst performing assets in 2025, he concluded that "peace deals" outperformed "conflict deals" in 2025. Harnett reminded investors to keep an eye on three key levels: 5% of the 30-year Treasury yield, 100 points of the U.S. dollar index, and 5,000 points of the Philadelphia Semiconductor Index (SOX). If there is another combination of "rising yields and falling dollars" between US Treasury yields and the US dollar (especially when Trump loses in the long-term US Treasury market), US stocks may usher in the next round of sell-off. However, Harnett believes that a yield of 5% is still the current line of defense (failure requires retreat). At the same time, the aversion to long-term assets has reached its peak – the ratio of biotech ETFs (XBIs) to broker ETFs (XBDs) has fallen to its lowest level since October 2007, underscoring the entrenched consensus of "buy everything but bonds". In the report, Harnett predicted that emerging market equities will be the core engine of the new bull market, and the three cornerstones supporting this trend are: a weaker dollar, a peak in Treasury yields, and China's economy. Despite the improvement in market breadth (84% of MSCI index constituents are trading above their 50-day/200-day moving averages, approaching the 88% oversold threshold), BofA's CBBS indicator is still stuck at 3.6, suggesting that sentiment has not overheated. Harnett warns that bond yields will reveal the ultimate outcome of US policy: a repeat of the "inflationary peace dividend" of the 70s (stagflation, protectionism) or the "deflationary peace dividend" of the 90s (globalization, central bank independence)? He is leaning towards lower US Treasury yields and deflation in 2025, but Moody's removal of the US AAA rating has cast a shadow over the long-term bond market. (Golden Ten)