By Julien Ponthus

(Bloomberg) -- US small- and mid-cap stocks are the best bets ahead of midterm elections as technology heavyweights lose their appeal, according to strategists at Bank of America Corp.

The team led by Michael Hartnett said that President Donald Trump’s “aggressive intervention” to reduce the price of energy, health care, credit, housing and electricity is weighing on sectors including energy giants, drugmakers, banks and big tech. That makes smaller stocks the main beneficiary from a “boom” in the run-up to US midterms.

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“We are long Main Street, short Wall Street until Trump approval rating up on policy pivot to address affordability,” they wrote in a note.

Investors have recently driven a rotation out of tech stocks amid concerns around a disruption from artificial intelligence. Instead, they’re on the lookout for trades that stand to benefit from efforts by the Trump administration to lower the cost of living. A broad category of firms sensitive to improving growth prospects has also outperformed.

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The Nasdaq 100 posted its biggest three-day drop since April this week, falling 4.6%. Separately, the S&P 500 has trailed its equal-weighted equivalent by 4.2 percentage points since the start of the year.

According to BofA, the flip from asset-light to asset-heavy business models suggests there is a “major threat” to the market leadership of the so-called Magnificent Seven technology stocks.

They note that AI capex spending from the biggest technology stocks is estimated at about $670 billion, or 96% of cash flows, this year. That compares with just 40% in 2023. “No longer the best balance sheets, no longer the biggest stock buybacks,” they said.

Hartnett’s preference for international equities since late 2024 proved prescient as the US underperformed global peers.

--With assistance from Michael Msika and Sagarika Jaisinghani.

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