Bank of America's chief investment strategist, Michael Hartnett, suggests that despite a significant recovery following an early-April selloff triggered by tariff concerns, the foundation for a lasting bull market is not yet in place. 

He indicates that a specific combination of favorable conditions, currently absent, is necessary for sustained market growth.

Current Market Conditions and Strategy

Hartnett observes that while the market has regained some ground, underlying weaknesses persist. He points out that a substantial number of stocks within the S&P 500 index(SPX.US) and NASDAQ-100(NDX.US) remain below their highs from the 2021-22 period. Furthermore, technical indicators show that only a third of stocks in these major indices are trading above their 200-day moving averages, signaling that the impact of the April downturn was extensive across various sectors. This broad weakness, according to Hartnett, reflects a shift in sentiment away from prior confidence in U.S. market superiority.

Given this assessment, Hartnett recommends a strategy of acquiring assets like bonds, international stocks, and gold during market downturns – collectively termed "BIG" – while capitalizing on rallies in U.S. equities and the dollar by selling into strength. He stipulates that while avoiding a recession would confirm that equity lows have been reached, a true bull market requires Treasury yields to drop below 4% and earnings growth to remain consistently above 5%.

Key Catalysts Required for a Sustainable Bull Market

Hartnett identifies three essential elements needed to fuel a more durable market rally:

1. Lower Treasury Yields via Monetary Easing: A primary requirement is a reduction in Treasury yields, driven by anticipated interest rate cuts from the Federal Reserve. Market expectations currently assign a low probability to a rate cut in May, but see increasing chances by June, reaching certainty by late July.
2. Significant Tariff Reductions: A meaningful de-escalation in U.S.-China trade tensions is crucial. Hartnett specifies that this would involve a substantial cut in current tariffs, bringing them significantly below the levels discussed during prior political campaigns.
3. Resilient Consumer Spending: The strength of the American consumer is a vital component. Hartnett notes conflicting signals: while a decrease in Southwest border encounters could potentially alleviate labor market tightness and support spending, significant headwinds exist. These include a multi-trillion dollar decline in U.S. household equity wealth year-to-date, which particularly affects the top earners responsible for a large share of consumption. Additionally, elevated inflation expectations, reaching levels not seen in decades, could encourage higher savings rates and restrain spending. A market rotation towards defensive stocks over discretionary ones further underscores concerns about consumer resilience.

Potential Shift in Long-Term Stock Valuations

Looking beyond the immediate future, Hartnett suggests that 2025 could mark a significant change in how stocks are valued. He contrasts the historical average price-to-earnings (P/E) ratio for the S&P 500 (around 14x in the 20th century and 20x in the 21st) with recent trends where 20x P/E acted as a floor, supported by globalization, technological progress, and the AI boom.

However, Hartnett proposes that this 20x P/E level might transition into a ceiling for valuations moving forward. He attributes this potential shift to factors such as the reversal of globalization trends, potentially diminished central bank independence, and the establishment of a higher baseline inflation rate (projected at 3%-4% outside of recessionary periods).