Mid-term election rally about to erupt; Bank of America sees small and mid-cap stocks becoming the new main theme of the US stock market

The U.S. banking strategist team stated that as the U.S. midterm elections approach, the appeal of tech giants is waning, and U.S. small and mid-cap stocks are currently the best investment choice.

The team led by Michael Hartnett pointed out that President Trump’s “aggressive intervention” policies to suppress energy, healthcare, credit, housing, and electricity prices are putting pressure on sectors such as energy giants, pharmaceutical companies, banks, and large technology firms. This makes small and mid-cap stocks the main beneficiaries during the pre-election “market explosion” phase.

In their report, they wrote: “Before Trump’s approval ratings rebound due to policy shifts toward livelihood security issues, we will go long on the real economy sectors and short on Wall Street’s financial sector.”

Recently, due to concerns about the impact of artificial intelligence (AI) technology, investors are accelerating their exit from tech stocks and seeking investment targets that can benefit from the Trump administration’s measures to lower living costs. Meanwhile, companies that are more sensitive to improving economic growth prospects generally outperform the broader market.

This week, the Nasdaq 100 index recorded its largest three-day decline since April, falling 4.6%. Additionally, from the beginning of this year to now, the S&P 500 index has underperformed its equal-weighted index by 4.2 percentage points.

Bank of America stated that corporate business models are shifting from “light assets” to “heavy assets,” which poses a “significant threat” to the market dominance of the so-called “Big Seven” tech stocks.

The team pointed out that this year, large tech companies are expected to spend about $670 billion on AI capital expenditures, accounting for 96% of their cash flow, compared to only 40% in 2023. They said, “These companies’ balance sheet advantages are no longer there, and the era of large-scale stock buybacks has also come to an end.”

Notably, Hartnett has been optimistic about international stocks since the end of 2024, a forecast that has proven to be highly forward-looking — subsequently, U.S. stocks have continued to lag behind other global markets.