BofA’s Hartnett Says Stock Resilience Signals Confidence in Central Banks

Global stock markets are showing an unusual degree of resilience even as central banks shift toward tighter monetary policy, and Bank of America strategist Michael Hartnett says that reaction may reveal something important about investor expectations.

According to BofA strategists led by Hartnett, the relatively limited decline in equities despite rising bond yields and a stronger U.S. dollar suggests investors believe central banks can restore policy credibility without causing a major economic downturn.

The interpretation comes at a time when inflation pressures, elevated energy prices and rising long-term borrowing costs are pushing major central banks toward a more restrictive policy stance.

For investors, the key issue is whether stocks can continue absorbing higher interest rates without a significant deterioration in economic growth or corporate earnings.

Stocks Have Absorbed a Sharp Rise in Bond Yields

One of the main observations from Hartnett's team is the relatively muted reaction of equities to the recent move in bond markets.

Since Federal Reserve official Kevin Warsh adopted a more hawkish tone at Jackson Hole, the 10-year U.S. Treasury yield has increased by about 60 basis points, while the U.S. dollar has gained roughly 2%. Over the same period, stocks have declined only around 1%, according to BofA's analysis.

Bond yields are particularly important for equity investors because they influence borrowing costs and the valuation investors are willing to assign to future corporate earnings.

Normally, a significant rise in Treasury yields can put pressure on stock valuations, particularly companies whose share prices depend heavily on expectations of earnings far into the future.

The fact that equities have remained relatively stable therefore suggests that investors are not currently treating the increase in yields as evidence of an imminent economic collapse.

Global Central Banks Are Becoming More Focused on Inflation Credibility

The backdrop has changed considerably from the period when central banks were primarily concerned about supporting growth.

BofA strategists said global central banks have delivered around 60 rate hikes this year, compared with about 20 in 2025. The broader policy shift reflects efforts to restore credibility around inflation control and prevent rising prices from becoming entrenched.

This matters because central-bank credibility affects financial markets well beyond the policy rate itself.

If investors believe policymakers will eventually bring inflation under control, longer-term inflation expectations can remain contained even while short-term interest rates rise.

If that confidence disappears, however, investors may demand higher compensation for holding long-duration bonds, pushing yields even higher.

That is one reason Hartnett's team is paying close attention to the market's reaction.

The Magnificent Seven Are an Important Signal

Another feature of the current market is the continued strength of the largest U.S. technology companies.

BofA noted that the so-called Magnificent Seven moved to new highs shortly after the Federal Reserve's latest rate hike.

That is notable because large technology companies have been among the stocks most exposed to changes in interest rates and expectations for future earnings.

Their resilience suggests that investors continue to place substantial value on strong earnings growth, particularly from businesses benefiting from artificial intelligence, cloud computing and semiconductor investment.

However, it does not mean higher rates are irrelevant.

If bond yields continue climbing sharply, valuation pressure could eventually become more important, particularly if earnings growth slows at the same time.

Why Rising Yields Are the Key Risk for Stocks

The biggest challenge to the current equity resilience is the possibility that bond yields rise faster than corporate earnings can absorb.

A Treasury yield is effectively a benchmark for borrowing costs across the economy. When government bond yields rise, financing can become more expensive for companies and households.

Higher yields can also reduce the relative attractiveness of stocks.

For example, if investors can obtain substantially higher returns from relatively low-risk government bonds, they may demand lower prices for equities.

This relationship is particularly important for high-valuation growth companies because much of their perceived value comes from earnings expected years in the future.

A higher discount rate reduces the present value of those future earnings.

The recent market reaction indicates that investors have so far been willing to look through this pressure. The question is how long that can continue.

Investors Are Still Moving Money Toward Equities

Recent BofA fund-flow data provides another indication that risk appetite has not disappeared.

For the week through September 16, global equity funds attracted about $79.3 billion, including $63.8 billion into U.S. stocks, according to BofA's Flow Show based on EPFR data. Investors simultaneously withdrew money from corporate bond funds.

The shift is significant because it occurred during a period of rising inflation concerns and global monetary tightening.

It suggests that investors are not simply abandoning risk assets because interest rates are moving higher.

Instead, capital is continuing to favor equities where investors see sufficient earnings or growth potential to compensate for the changing interest-rate environment.

However, fund flows can change quickly if economic data deteriorates or bond-market volatility accelerates.

AI Remains a Major Part of the Market Equation

The resilience of technology stocks is closely linked to the enormous investment cycle surrounding artificial intelligence.

AI-related capital expenditure has become an important source of demand for semiconductor manufacturers, cloud companies, data-center operators and infrastructure suppliers.

That spending has also helped support corporate earnings expectations.

But there is a potential tension.

BofA strategists have previously warned that investors remain highly exposed to the AI investment cycle. In September, the bank's fund-manager survey showed strong conviction around AI-related capital spending, even as concerns about bond-market disorder increased.

If AI investment continues generating strong revenue and productivity gains, high valuations may remain easier to justify.

If spending rises much faster than actual economic returns, however, the market could become more sensitive to higher interest rates.

That makes AI earnings, capital expenditure and productivity trends important indicators alongside inflation and bond yields.

Central-Bank Credibility Is Becoming a Market Driver

Hartnett's argument is ultimately less about whether higher rates are good or bad for stocks and more about what the market is saying through its behavior.

If investors believed that global tightening would inevitably produce a severe recession, a sharp equity sell-off might be expected.

Instead, stocks have remained comparatively resilient despite the increase in yields and the stronger dollar.

That can be interpreted as a degree of confidence that policymakers can control inflation while keeping economic growth sufficiently strong.

But there is an important distinction between confidence in central banks and confidence that rates can rise indefinitely without consequences.

The latter would be a much stronger claim, and current market behavior does not prove it.

What Investors Should Watch Next

Several indicators will determine whether the current resilience can continue.

U.S. Treasury yields: A further rapid rise in long-term yields could put greater pressure on equity valuations.

Inflation: Persistent inflation would make it harder for central banks to ease policy.

Corporate earnings: Earnings growth needs to justify equity valuations as financing costs rise.

AI capital expenditure: Continued spending can support technology earnings, but investors will increasingly want evidence of corresponding revenue and productivity gains.

Credit spreads: Widening spreads would indicate that investors are demanding more compensation for corporate credit risk.

Equity fund flows: Continued inflows would show that investors remain willing to accept equity risk despite tighter monetary conditions.

Market volatility: A sharp increase in Treasury and equity volatility could signal that the market's current confidence is weakening.

The Bigger Question for Global Markets

The current market environment is unusual because rising yields have not yet produced the kind of equity reaction that might normally be expected.

BofA's Hartnett interprets that resilience as evidence that investors believe central banks can restore policy credibility and contain inflation without derailing the broader economic and earnings cycle.

That interpretation will ultimately be tested by the data.

If inflation moderates while economic growth and corporate earnings remain healthy, equities may continue to absorb higher rates. If yields keep rising while earnings expectations weaken, the balance could change quickly.

For Indian investors, the implications extend beyond Wall Street. U.S. Treasury yields, the dollar, global liquidity and Federal Reserve policy can influence emerging-market capital flows, the rupee, technology valuations and broader risk appetite.

The next phase of the market will therefore depend not simply on whether central banks raise rates, but on whether investors continue to believe those policies can restore price stability without causing a major growth shock.

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This article is for informational and educational purposes only and should not be considered investment advice.