Bank of America’s Hartnett: The current U.S. stock rally is supported by fiscal policy and AI; if financing costs rise, the market may reverse.

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Bank of America’s Hartnett believes the current sustained rise in US stocks is being driven by massive government fiscal spending and AI investment, forming a self-reinforcing "boom loop." However, there is a clear breaking point in this cycle—if the bond market collapses and long-term Treasury yields break through key resistance levels, the market may turn quickly.

On May 3, Michael Hartnett, Bank of America's Chief Strategist, pointed out in his latest report "Boom Loop" that US nominal GDP is currently in a 75% expansion cycle over seven years, AI investment contributed 75% of Q1 GDP growth this year, and government spending has climbed 60% since 2020. These two forces together are underpinning the strong performance of stocks and commodities, while bonds and the US dollar are under pressure.

He views the 5% yield on 30-year US Treasuries as a "Maginot Line," and expects that this level will hold. However, if this line is decisively breached, "the door to doom will begin to open."

Fiscal Expansion and AI Investment Create a "Boom Loop"

Hartnett characterizes the current macro environment as a policy-driven "boom loop."

Data shows that US nominal GDP, from $20 trillion in 2020, is projected to reach $35 trillion by 2027, marking a 75% increase over seven years.

Meanwhile, the inflation center has shifted up from 2% in the 2010s to 4% in the 2020s, while economic growth has increased slightly from about 2.5% to around 2.75%.

Against this backdrop, US GDP grew by 2.0% in the first quarter of this year, of which about 75% came from AI-related investment, highlighting AI’s core contribution to the current economic expansion.

Hartnett notes that policymakers in various countries are employing the most aggressive government spending to address deglobalization, populism, and inequality.

US government spending has risen 60% since 2020, and the proposed FY2027 budget would add another 15% on top of that. Meanwhile, geopolitical games are being advanced through trade, industrial, and financial market policies with inflationary effects, aiming to monopolize the supply of AI strategic resources such as chips, oil, rare earths, and minerals.

In Hartnett's view, this dual drive of fiscal and technology policy benefits stocks and commodities amid nominal prosperity, while bonds (yield curve steepens) and the dollar are relatively pressured.

5% Is the Key Line, Bond Market Collapse Is the Biggest Tail Risk

Despite currently optimistic market sentiment, Hartnett clearly points out the fatal weakness in this boom loop: a collapse of the bond market.

He defines the 5% yield on 30-year US Treasuries as the "Maginot Line" and expects this level to hold.

The logic supporting this judgment is stated in the report:

The Trump administration is actively maintaining the buying base for US Treasuries—holders in Asia and the Middle East together hold about $3.8 trillion in US Treasuries, and policy coordination at the currency level is considered an important means of stabilizing this buying base.

In addition, Trump’s polling support on inflation issues has dropped to only 29%, close to Biden’s low of 28%, which also gives the government the political motivation to stabilize the bond market.

However, Hartnett simultaneously warns that every past ending of a boom or bubble in history has been accompanied by a sharp rise in yields: Yields on Japanese government bonds rose 230 basis points in 1989, and US government bond yields climbed 260 basis points in 1999.

Once the 5% line is decisively breached, "the door to doom will begin to open," and the current boom loop will face a fundamental reversal.

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