AI bull market’s biggest enemy is not the bubble, but the bond market? Latest warning from BofA’s Hartnett

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The bond market is becoming the most dangerous variable in the AI bull market.

On July 27, Bank of America Chief Investment Strategist Michael Hartnett issued a warning in the latest Flow Show report: The 30-year U.S. Treasury yield has risen to 5.2%, the highest level since June 2007, the real yield has reached 3%, a peak since November 2008, and U.S. tech bond prices have fallen to a two-year low—the tightening of financial conditions is now surpassing the support provided by corporate profits.

Hartnett’s core judgment: The pressure in the bond market will not dissipate on its own, and may instead force the Federal Reserve to raise interest rates, which is the last thing the stock market wants to see. He warns that once the bull market combination of “rising bond yields and rising bank stocks” reverses to “the higher the yield, the more bank stocks fall”, it will become the trigger for a new wave of deleveraging in risk assets.

At the same time, the credit default swaps (CDS) of hyperscale cloud computing companies have reached all-time highs, bondholders are voting with their feet, questioning the logic behind the AI capital expenditure frenzy.

The backdrop to this warning: Chip stocks are being sold off even after Google and Intel posted solid earnings, and the market’s real concern has shifted from “can it make money” to “who foots the bill”—if the bond market no longer funds the AI feast, where will funds come from for those sky-high-priced memory chips and negative-return frontier models?

Bond Market Pressure Surpasses Earnings, Financial Conditions Become the Core Variable

Hartnett explicitly outlines the “FCI > EPS” core framework in the report, i.e., the impact of tightening financial conditions (Financial Conditions Index) on the market has exceeded the support role of corporate earnings (EPS).

30-year U.S. Treasury nominal yield hit 5.2%, the highest since June 2007; real yield rose to 3%, the highest since November 2008; U.S. tech bond prices have fallen to a two-year low. The combination of these three indicators means that the cost of financing in the market is systematically rising, yet this pressure has not been fully priced in by equity investors.

Hartnett points out that there have already been 23 central bank rate hikes worldwide since 2026, and Bank of America expects another 18 by year-end. More notable, the implied probability of a Fed rate hike at the July 29 meeting has risen to 38%, with a September 16 hike fully priced in. He even makes a provocative point in the report:

“Politically, isn’t it smarter for the Fed to raise rates this week than wait until September?”

Hartnett’s logic points to a paradoxical conclusion: Pressure in the bond market could instead force the Fed to hike rates to stabilize long-term yields. He believes that resolving this scenario depends solely on raising rates to curb the disorderly rise of long-term yields.

However, rate hikes are bad news for stocks. Hartnett warns that we need to closely watch whether the bull market combination of “rising yields, rising bank stocks” will flip to “the higher the yield, the more bank stocks drop”—if so, it will trigger deleveraging of risk assets. In this scenario, he thinks going long the dollar is the best hedge against a hawkish Fed stance.

He also points out that equity investors have yet to recognize interest rates as a threat to the “Anything But Bonds” bull market, but if a market-friendly Trump administration tolerates rate hikes to “hit the brakes” on stocks and anti-billionaire sentiment, the market will suffer an enormous shock.

Hyperscale Cloud Service Credit Risk at Record Highs, AI Capex Logic Questioned

The most direct manifestation of bond market pressure is the acute deterioration of credit risk indicators for hyperscale cloud computing companies. According to the report, credit spreads for the hyperscaler group have widened substantially, CDS have reached all-time highs, and concessions in bond issuance are continuously increasing.

The root cause of this is the market’s doubt over the ROI (return on investment) of AI capital expenditures. Google and Tesla are seen as benchmark companies for “capital expenditure ROI.” Even though Google and Intel posted solid earnings last week, chip stocks are still being sold off. The key question the market is asking:

If bondholders no longer want to foot the bill for the AI feast, frontier models and memory chip demand—those highly dependent on sustained capital infusions—will face funding risks.

Hartnett has previously echoed the views of Goldman Sachs’ top derivatives trader Brian Garrett—that the real risk for AI stocks lies not within equities, but in the bond market. Garrett has for two consecutive weeks warned that the pain in credit markets will intensify and noted that the S&P 500 is less and less representative of the average stock’s performance, with market internal divergence (low correlation, high dispersion) growing.

Additionally, Hartnett sees “blue-collar semiconductors”—Texas Instruments, Analog Devices, NXP, Microchip, ON, STMicroelectronics, Infineon, Monolithic Power—as leading indicators of the industrial cycle. This group has dropped 21% from its June peak.

At the same time, hyperscale tech giants (MAGS) are struggling to hold their 200-day moving average ($65), challenging the widely held “boom” consensus. The July Bank of America fund manager survey shows investors are the most overweight in industrial stocks since July 2021.

In response, Hartnett offers the short-term trading recommendation: go long defensive stocks, high-dividend stocks, and long-duration bonds; go short bank stocks (which have seen massive inflows recently), brokerage stocks, tech stocks, and industrial stocks, in order to hedge an impending “boom” reversal.

Dual Pressure on Bond and Equity Supply, Gold and Bitcoin Quietly Bottoming Out

From a broader perspective, Hartnett characterizes the 2020s as an era of: The rise of political populism, globalization yielding to national security, fiscal surpluses turning into AI capex excess, the Fed’s independence compromised by politics, and the evolution of American exceptionalism toward global rebalancing.

In this context, “supply” rather than “demand” becomes the main driver of the macro and the market. This manifests on three levels:

Immigration controls tighten labor supply (U.S. initial jobless claims at their lowest since 1969); protectionism and tariffs restrict import supply (the U.S. plans to impose new tariffs on 60 trade partners); geopolitical shocks disrupt oil supply (of about 8 billion barrels/day of seaborne oil worldwide, about 6.4 billion barrels pass through chokepoints like the Strait of Hormuz and Bab el-Mandeb).

By contrast, the constraints on bond and equity supply are loosening. The U.S. government still runs a $2 trillion annual fiscal deficit, with annual interest payments of $1 trillion—even $250 billion in tariff revenue over the past 12 months can’t fill the gap. Companies with negative free cash flow are cutting back on stock buybacks, further reducing support from stock supply.

Against this backdrop, Hartnett believes gold and bitcoin are quietly bottoming out for 2026, while bank stock indices representing “Main Street” will outperform broker and private equity indices representing “Wall Street” in the latter half of the 2020s.

In addition, he lists Hong Kong real estate stocks as one of the most attractive long-term buying opportunities—the current share prices are flat with levels 30 years ago, and he intends to buy the dip in any decline triggered by Fed tightening or a currency crisis at the Bank of Japan.

Risk Warning and DisclaimerMarkets have risks, investment should be cautious. This article does not constitute personal investment advice nor does it take into account the individual investment objectives, financial situation, or needs of any particular user. Users should consider whether any opinions, views, or conclusions contained in this article are appropriate for their particular circumstances. Investing based on this information is at your own risk. ```