Bank of America (BofA) strategists argue there is a strong case for the Federal Reserve to begin raising rates this year, starting with a 25‑basis‑point increase in September. Their base case envisions a cumulative 75‑basis‑point tightening across the remaining scheduled meetings before year‑end. Market pricing currently reflects about a 15‑basis‑point probability of a September hike, while the market’s expectation for total hikes by December is roughly 40 basis points below BofA’s 75‑basis‑point forecast.
BofA notes that a September hike would likely push U.S. 10‑year real bond yields higher; a roughly 10‑basis‑point rise in the real yield over the past week, they say, "explains all of the STOXX 600 decline seen over the period." From a sector perspective, higher U.S. real yields would create headwinds for semiconductors, personal and household goods, and utilities, which have negative sensitivity to rate moves. Conversely, airlines, banks and energy would receive the greatest support.
The firm remains negative on European equities overall, underweighting cyclicals relative to defensives. Their macro assumptions imply a roughly 10% downside for the STOXX 600, targeting a level near 580 by the second quarter, and an additional 5% relative underperformance for cyclicals versus defensives. BofA’s preferred defensive overweight is food and beverages, while it underweights banks and capital goods on the cyclical side.
Despite the hawkish outlook, BofA’s rates strategists have begun positioning for a modest decline in bond yields, citing softening near‑term inflation momentum and weaker U.S. jobs and consumer data. They also see upside potential for risk premia given historically low levels, noting risks from possible AI capex disappointment, weak U.S. jobs growth, and energy‑supply disruptions stemming from the U.S.–Iran conflict.