Bank of America Warns Stock Rally Could Reverse After November Midterms

Bank of America's Michael Hartnett is telling clients the market's next real test lands after the November midterms, not before.

In a note to clients dated Friday, Hartnett's team framed the election as a referendum on "populist capitalism vs populist socialism" and said a Democratic sweep of Congress could trigger a "big" reversal in stocks. Their advice: reduce exposure to risky assets now and rotate into defensive positioning, with gold as a preferred hedge.

This isn't a call about who should win. It's a call about what markets do if control of Congress flips. BofA isn't alone in flagging midterm-year turbulence. Goldman Sachs has noted that in every midterm year since 1974, the S&P 500 has posted a median return of roughly 0% from August 1 through Election Day. Oppenheimer analysts have separately pointed out that when a president is in his second term during a midterm year, the S&P 500 tends to see a correction in the third quarter. Both are historical patterns, not predictions specific to 2026.

The wealth effect problem

The bigger worry, according to BofA, isn't politics by itself. It's what happens to consumer spending if the rally that produced roughly $9 trillion in market gains over the past two years goes into reverse.

A lot of recent U.S. economic resilience has been propped up by that wealth effect, higher stock and home values making people feel richer and spend accordingly. That effect cuts both ways. If equities fall hard, the households most exposed to markets pull back, and that pullback can bleed into corporate earnings and broader growth.

BofA's strategists tied this directly to what they call the K-shaped economy. Top earners have ridden higher stock and real estate prices. Lower- and middle-income households have been stuck absorbing sticky inflation and a rougher job market. Hartnett's team said an electorate frustrated by that gap could deliver an "it's the economy, stupid" verdict at the ballot box in November.

That's a real and fair concern. Voters who haven't benefited from the stock market boom and are still paying more at the grocery store have legitimate grounds to be angry, regardless of which party they blame. Whether that anger produces a Democratic sweep, a split result, or something else is genuinely unknown three months out.

Bonds, not politics, may be the bigger trigger

BofA's more immediate warning isn't about who wins in November. It's about Treasury yields.

The bank said yields could move meaningfully higher if investors grow more worried about inflation and the federal government's fiscal position. The 10-year Treasury yield is currently sitting around 4.67%, above the 4.5% level BofA and other strategists watch as a psychological threshold. Yields have already been climbing on inflation concerns, and markets have absorbed the move so far without much drama.

Hartnett's team put it bluntly: "Bonds end booms and bubbles, and this one ends once 'higher yields-lower dollar' vigilante event forcing fiscal policy U-turn, and asset allocation from stocks to bonds rise." They're calling rising yields a "canary in the coalmine."

The mechanism is straightforward. If yields climb high enough, government bonds start looking more attractive than stocks, and higher borrowing costs squeeze corporate profits and equity valuations at the same time. BofA's bear case has that dynamic popping what strategists across Wall Street have described as an AI-driven bubble in tech valuations.

What's actually new here

Neither the midterm political risk nor the K-shaped economy is a new storyline. What's specific to this note is the sequencing: BofA is explicitly naming rising Treasury yields, not the election outcome itself, as the more immediate threat, with the political risk layered on top as a potential accelerant in November.

No Democratic sweep has happened. No congressional majority has changed hands. This is a strategist's risk note about a possible outcome three months away, built on historical midterm patterns from Goldman Sachs and Oppenheimer plus BofA's own read on bond markets.

The open question is whether the 10-year yield breaks meaningfully above 4.67% in the coming weeks, and whether that move comes from inflation data, fiscal concerns, or anticipation of the midterms themselves. BofA says that's the number to watch before Election Day, not the polling.