AI bubble, diesel shock, soaring yields! Bank of America's Hartnett warns of looming stagflation risk this fall.

Triple pressures are converging on the market.

In his latest Flow Show report, Bank of America's chief investment strategist, Michael Hartnett, warned that record diesel prices, a surge in 30-year Treasury yields to their highest level since 2007, and productivity concerns masked by the AI boom are all contributing to a risk of stagflation this fall.

Hartnett lists the Transportation ETF (IYT) as the most critical indicator to watch. He points out that if the IYT falls below the 80-point support level of the 200-day moving average, it will confirm that the macro deleveraging that was "at its best time" in the summer has officially evolved into a stagflation event in the fall. At the same time, he warns that "a calm market coupled with tough policies is a breeding ground for volatility," and explicitly states that "it's not too late to hedge against AI bubble indices."

Fund flow data also confirms the subtle shift in market sentiment. Over the past three weeks, the average weekly net inflow into US stocks was only $7 billion, a significant decrease from the peak of $52 billion in July; US stocks also recorded the largest three-week net outflow since January 2026, amounting to $14.2 billion.

Diesel fuel is the real pressure point.

While news of crude oil prices returning to $100 a barrel made headlines, Hartnett pointed a greater warning to the diesel market. In his report, he explicitly stated that diesel is "the core of the pressure on the real economy"—shipping, trucking, agriculture, construction, and mining are all highly dependent on it.

Diesel crack spreads have now hit a record high of $102 per barrel, while retail diesel prices have also reached a record high of $6 per gallon. In contrast, crude oil prices remain well below their peak levels during the Ukraine crisis, highlighting the unusual pressure on the refining sector.

Hartnett warns that this surge in the largest input costs for the entire industrial U.S. cannot be ignored. He has designated the IYT Transportation ETF as a key indicator to watch: the ETF is currently testing the 80-point support level of the 200-day moving average, and a decisive break below this level would formally confirm the fall stagflation scenario.

High yields diminish the diversification effect of bonds

The yield on 30-year US Treasury bonds has risen to its highest level since June 2007, but there are still no signs of panic in the market as a whole.

Hartnett cited historical patterns, pointing out that "markets usually test policy resolve"—after the joint US-Japan intervention on July 31, 2026, the yen tested the 160 level before being pushed back below 154; the day after QE3 was announced in 2012, the 30-year US Treasury yield jumped 16 basis points in a single day; and within days of QE4 being implemented in 2020, it surged by 51 basis points.

He also pointed out that the current "peak yield" trade is working, with the long-duration rebound of XBI, KRE, REITs and small-cap stocks starting ahead of the central bank's interest rate hike, but this rebound has not been supported by a simultaneous inflow of funds.

Regarding bond allocation, Hartnett issued a deeper warning: During the "long-term stagnation" period from 2000 to 2019, bonds and stocks were negatively correlated, and a yield of 2% to 3% was almost an extra bonus; but now the returns of the two asset classes are positively correlated again, and allocators may need higher yields to shift to bonds on a large scale, and the diversification protection effect of bonds is rapidly fading.

AI Bubble Concerns: Productivity Data Sends Alarms

In his report, Hartnett raised the most direct criticism of the AI boom to date. He pointed out that although AI-related investments have exceeded $1.5 trillion over the past three years, evidence of productivity gains across the entire economy remains scarce—total factor productivity (TFP) is falling below its long-term trend line, an indicator that has been highly correlated with consumer confidence over the past 50 years.

Another side effect of the AI boom has been reflected in valuations: the free cash flow yield of the S&P 500 has been pushed to historic lows. Hartnett data shows that the high free cash flow stock portfolio (VFLO) has risen 37% year-to-date, outperforming the broader market; in 2022, a typical stagflation year, the portfolio rose 9%, while the S&P 500 ETF (SPY) fell 18% over the same period.

His conclusion is quite cautionary: "Sometimes, Main Street knows things that Wall Street doesn't."

Fund flows: Equities become less attractive, while bonds and cryptocurrencies gain favor.

The latest weekly global fund flow data shows that bonds attracted $17.5 billion, cash inflows totaled $12.9 billion, stocks saw inflows of $9.8 billion, cryptocurrencies saw inflows of $1.3 billion, and gold saw inflows of $600 million.

Specifically, global bonds have seen an average weekly net inflow of $18 billion for four consecutive weeks; investment-grade bonds recorded net inflows for the 23rd consecutive week, with a weekly inflow of $5 billion; Chinese stocks recorded net inflows for the first time in six weeks, amounting to $1.1 billion; the materials sector saw net inflows for the 10th consecutive week, reaching $1.9 billion; and cryptocurrencies have seen a cumulative net inflow of $6.8 billion over the past six weeks, showing strong momentum.

Hartnett's proprietary sell indicator dipped slightly to 9.5 this week from 9.6, primarily due to slower stock inflows and capital outflows from the healthcare sector. It's worth noting that since the indicator triggered a sell signal on May 2nd, the S&P 500 has risen 1.0% and the global ACWI index has risen 1.5%, with no significant market correction yet. However, Hartnett believes this has actually increased the pressure for further risk release.

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