Regarding the "AI bubble," "selection politics," and "overturning tariffs," Bank of America’s Hartnett says, "A top is a process, while a bottom is an instant."

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Michael Hartnett, Chief Investment Strategist at Bank of America, pointed out in his latest report that the formation of a market top is a slow fermentation process, not an instantaneous event that happens all at once.

He believes that the current market is clearly showing many signs of this process, with key clues including increasingly tight credit conditions for AI giants, political pressure from "Main Street" citizens over the cost of living, and the possibility of a disruptive shift in US tariff policy. Hartnett incisively stated: "A top is a process, a bottom is an event."

The latest developments show that the financing model of AI "hyperscale enterprises" is facing a severe test. To support their massive capital expenditure arms race, these tech giants are rushing into the bond market on an unprecedented scale, directly resulting in a significant widening of their credit spreads.

Hartnett pointed out that this change is a key signal of the AI bubble he previously warned was "worth watching," indicating that the market's view on the sustainability of the AI story is shifting from equity euphoria to a more prudent credit risk assessment.

Meanwhile, two other major forces are brewing, which may jointly reshape the market landscape. First, recent US election results have revealed voters’ strong dissatisfaction over "affordability," and this "Main Street anger" indicates that the government might step up interventions to control prices, thereby squeezing corporate profits. Second, Hartnett emphasized that a potential Supreme Court ruling to overturn current tariffs has become a significant market variable, possibly reducing inflation expectations and creating structural opportunities for emerging markets.

In summary, these signals from the credit market, political winds, and policy changes together form the core basis of Hartnett’s argument that “a top is a process.” Although he believes the "exit" signal that would trigger a large-scale sell-off has not yet appeared, a series of complex early-warning indicators have already lit up, requiring investors to remain highly vigilant and to reassess their asset allocation.

Cracks in the AI Bubble: From Equity Frenzy to Credit Squeeze

Hartnett explicitly pointed out that the boom and bubble in the AI sector is entering a new stage, with its vulnerabilities beginning to show on the credit side. He observed that AI giants' own cash flows are no longer sufficient to support their aggressive capital spending plans, forcing them to turn to the bond market for financing. Over the past seven weeks, related companies have issued as much as $120 billion in bonds, with even industry leaders suggesting that government guarantees may be needed to lower capital costs.

The market’s reaction has been direct. According to Bank of America, the bond spreads of these hyperscale enterprises have widened from 50 basis points in September to nearly 80 basis points, indicating that the low-point for spreads has passed and investors' risk aversion is rising. Hartnett cautioned that this resembles the period leading up to the 2000 dot-com bubble burst—US tech bonds fell 8% during the 12 months before the stock market peaked in March 2000.

Although Hartnett believes that, since the Federal Reserve has not raised rates, the "exit" moment for shorting the entire stock market has not yet arrived, he is already turning his attention to AI giants’ bonds, considering shorting hyperscale corporate bonds to be the better current strategy. He even predicts that when the next round of quantitative easing arrives, "you’ll see the Fed buying the bonds of AI hyperscale enterprises."

"Politics of the Middle Class": When Wall Street's Prosperity Meets Main Street's Anger

Political factors are becoming key variables impacting the market’s direction. In his report, Hartnett analyzed that Trump's poll support has dropped to 43%, especially weak on economic (41%) and inflation (36%) issues. This makes controlling inflation and the budget deficit critical in 2026.

More direct evidence comes from recent elections. Democrats won in places like California, Virginia, New Jersey, and New York City, and in each place the most pressing concern for voters was "affordability." Hartnett interpreted this as meaning that prosperity and bubbles rarely solve inflation and inequality. Main Street's anger over the cost of living is sending a clear message to Wall Street: "You can't let the market overheat, because higher stock prices may mean fewer votes."

He expects such political pressure will prompt the government to shift from "the invisible hand" to "the visible fist," intervening more directly in prices for energy, healthcare, housing, and even utilities (with AI-driven surges in power demand), which will negatively impact profit margins in related industries.

Policy Shift: The Dusk of Tariffs and the Dawn of Emerging Markets?

On the policy front, a potentially market-shifting event is approaching. Investors currently favor US “national security” stocks, such as large tech, semiconductor, and aerospace defense sectors. However, Hartnett warns that if the US Supreme Court ultimately rules to overturn current tariffs—which he sees as the most likely outcome—the market logic will face restructuring.

The shift in tariff policy will have a series of chain reactions: First, the US government’s ability to use technology as a lever for global influence will be weakened; second, tariff revenue will fall; but more importantly, this move will help lower inflation expectations. Data shows that since Trump was elected, US one-year inflation expectations have risen from 2.6% to 3.4%, with the ISM services prices paid index reaching a three-year high.

Hartnett reiterated his earlier view that going long on emerging markets (EM) is the best way to trade the "tariff top-out" theme.

The "K-Shaped" Pressure on the Economy: Cooling Job Market and Recession Hedges

Finally, Hartnett turned his attention to the increasingly sluggish US labor market, believing this reflects the deepening "K-shaped" divide in the economy. Multiple data points show the job market is cooling rapidly: Challenger's report shows more than one million layoffs so far this year, the highest since 2020; ADP’s job growth over the past three months was only 3,000; and the unemployment rate for fresh graduates soared from 4% in 2023 to 8%.

Although these data have yet to reach recession levels, structurally driven unemployment fueled by AI is accelerating. Meanwhile, weakness in the homebuilding sector signals that those in the middle of the "K-shape" feel "poorer, not richer."

In the face of these potential recession signals, Hartnett’s best hedging advice is: go long on zero-coupon bonds.

Risk Disclosure and DisclaimerThe market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account individual users' specific investment objectives, financial status, or needs. Users should consider whether any opinion, view, or conclusion in this article is suitable for their particular situation. You are responsible for investing based on this information. ```