"Bank of America’s Hartnett: The fate of the US stock bull market depends on the 'midterm elections and Iran'"

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Michael Hartnett, Chief Investment Strategist at Bank of America, has issued another warning, believing that US stocks are currently in the biggest tech bubble since 2021, and that the forces ending this bubble have always historically been "voters and bond vigilantes."

In the latest Flow Show report, Hartnett summarizes the current market structure with three "V"s—Victory, Votes, Vigilantes—and points out that if the Republican Party loses the Senate election in November, it will trigger a triple sell-off: "falling dollar, falling US Treasury yields, falling stock market."

At the same time, he warns that the fate of the US economy and stock market largely rests in Iran's hands—whether oil prices can fall sharply will determine whether inflation can drop below 3%, and subsequently influence the Federal Reserve's policy trajectory.

Despite the market currently being indifferent to these risk signals—US stocks continue to hit new highs in the face of the highest CPI data in three years and the Fed’s hawkish stance—Hartnett's BofA Bull & Bear Indicator has risen from 8.9 to 9.2, delving further into the "sell" range, continuing the sell signal triggered since May 2026.

AI Bubble Highly Concentrated, Historical Precedents Sound Alarm

Hartnett points out that AI-related stocks now account for 39% of the S&P 500 index, reaching the historical ceiling of bubble concentration—a level comparable to the extreme concentration of railroad stocks in the 1880s.

He cites historical patterns from the 2000 tech bubble to emphasize that concentration does not equal rotation. From the October 1998 low to the March 2000 high, only tech stocks outperformed the S&P 500; and in the last six months before the bubble burst, only tech and telecom sectors maintained positive returns. The current market structure is highly similar to that period, and the scale of capital misallocation now far exceeds that of 1999 to 2000.

Hartnett also notes that since Fed Chairman Warsh was nominated on January 30, the US yield curve has experienced a significant bearish flattening, with the 2-year/10-year spread narrowing from 75 basis points to 25. He points out that CPI growth outpacing the unemployment rate is extremely rare in history, but each occurrence coincides with an inverted yield curve, which has always been a reliable recession signal.

Midterm Elections as Key Variable, Trump Support Rate Stirring Market Nerves

Hartnett lists the November midterm elections as the most important political risk node. He says that, as the Iran situation is easing, the previous pressures on Trump's economic and inflation support rate may be relieved, but if the Republican Party loses the Senate election, the market will face systemic shock.

He cites his classic judgment: "Booms and bubbles end with voters and bond vigilantes." Even if the bubble doesn’t burst immediately, Hartnett believes that if Trump’s support rate does not show a clear rebound before September, bullish sentiment will begin to waver.

Currently, Wall Street's "approval" is at a historic high, with US household stock wealth increasing by $6 trillion this year and market sentiment extremely optimistic. Nonetheless, the BofA Bull & Bear Indicator’s "extreme bullish" positioning is historically a contrarian signal—since 2002, the indicator has triggered sell signals 17 times, with global stocks on average falling 2% to 3% within the following 2–3 months, with an accuracy rate of around 60% and a maximum drawdown of 15% to 20%.

Funds Still Pouring In, But Sell Signals Deepen

Despite constant risk warnings, capital flow data shows investors are still ramping up positions. According to the latest weekly EPFR data, US equities saw a record single-week net inflow of $119.2 billion; annualized, US stock inflows in 2026 may reach a historic high of $739 billion. Tech stocks also saw a record single-week inflow of $19.2 billion, annualized at $154 billion. US mid-cap and small-cap stocks similarly recorded historic single-week inflows of $19.9 billion and $12.3 billion, respectively. In contrast, European equities recorded outflows for the tenth straight week.

Hartnett’s core judgment is that the bear market path from inflationary boom to stagflationary recession is almost set, and the only variable that could break this process is whether a sharp fall in oil prices can bring CPI below 3%. The key to this variable lies in the direction of the Iran situation. He maintains the "sell on rally" recommendation before the July 29 Federal Reserve meeting, waiting for tighter financial conditions to eventually arrive.

Risk Warning and DisclaimerThe market carries risks, investing should be cautious. This article does not constitute individual investment advice and does not take into account any individual user's specific investment objectives, financial situation or needs. Users should consider whether any opinions, views or conclusions in this article suit their particular circumstances. Investment according to this article is at your own risk. ```