BofA: Small-cap stocks likely to outperform into US midterms

Bank of America says investors should favor Main Street plays as the US midterms approach, arguing a "[F]lip from asset-light to asset-heavy business model suggests major threat to 2020s market leadership of Big Tech/Magnificent 7," analysts led by Michael Hartnett wrote, adding that AI capex means hyperscalers are "no longer the best balance sheets, no longer the biggest stock buybacks." The bank pointed to small-cap stocks, emerging markets, and REITs as the unloved assets poised to gain.

It said President Donald Trump's focus on affordability has pressured sectors including banks and Big Tech, and warned that "Aggressive intervention to reduce price of energy, healthcare, credit, housing, electricity via Big Oil, Big Pharma, Big Banks, Big Tech means small & mid-cap best play for 'boom' on Main St in run-up to US midterms." The market rotation has already accelerated, with investors selling AI-exposed names amid a scare over Anthropic's new tools and moving into value stocks.

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