Bank of America’s chief investment strategist Michael Hartnett sees a powerful rotation in financial markets, with so-called “peace trades” now eclipsing “war trades” as the key driver of 2025 performance — a shift that could unleash the next bull market in emerging markets.
In his latest “The Flow Show” note shared Friday, Hartnett said a rare combination of falling oil prices, a weaker dollar, and a bond yield ceiling near 5% is reshaping the global investment landscape. The strategist cited a dramatic rally in emerging markets and sharp inflows to risk assets as signs of a growing consensus that diplomacy and disinflation are back in style.
‘Peace Trades’ Powering 2025 Market Leaders
“Big geopolitics = big price action,” Hartnett said, highlighting that Tel Aviv and Tehran stock exchanges have hit all-time highs, Poland’s market – tracked by the iShares Poland ETF EPOL – is up 28%, and Russia’s ruble is the best-performing currency this year, gaining 41%.
The top-performing asset year to date remains gold, up 22.1%, while oil is the worst, down 14% — a reversal Hartnett calls the “peace dividend.” Stocks are up 5%, government bonds 4.3%, and the U.S. dollar is down 7.2%.
A potential “Riyadh Accord,” Hartnett said, could be driving this geopolitical detente.
Lower oil prices may stem from behind-the-scenes deals between the U.S., OPEC and Russia, as Trump allegedly pursues lower inflation via energy diplomacy, rather than shale output.
30-Year Yield Is The Macro Pivot
Hartnett identified three macro pressure points: the 30-year Treasury yield at 5%, the U.S. dollar index at 100, and the SOX semiconductor index at 5000.
If yields decisively breach the 5% threshold, stocks could falter. But for now, Hartnett says the level is holding, reinforcing the disinflation narrative.
A weak dollar, peak yields, and a Chinese economic recovery form the backbone of his next bull market thesis, with emerging markets ex-China – as tracked by the SPDR S&P Emerging Markets Ex-China ETF XCNY – already up 20% in the past month, breaking a 20-year trading range.
Flows Confirm The Rotation
Flows into risk assets have surged in recent weeks. Investors poured $25.2 billion into stocks and $13.1 billion into bonds last week, while pulling $17.5 billion from cash.
Notably, U.S. equities saw their first inflow in five weeks at $19.8 billion, and financials drew in $1 billion, reversing a seven-week drought. Emerging market debt attracted $1.5 billion, its largest inflow since January 2023. Investment-grade and high-yield credit combined saw $8.6 billion, the biggest in 10 weeks.
Gold, however, had a modest $0.4 billion outflow, despite being on track for a record $85 billion inflow in 2025.
A 1970s Or 1990s Outcome?
Hartnett said the key question for markets is whether the late 2020s will echo the “inflationary peace dividend” of the early 1970s or the “disinflationary peace dividend” of the early 1990s.
The former involved volatile macro policy, oil shocks and protectionism; the latter delivered stable growth via globalization, deregulation and lower rates.
He sees 2025 surprising with lower yields and disinflation, but warns that the secular outlook for government bonds remains bearish.
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