The Biggest Enemy of the AI Bull Market Isn't Bubbles, But the Bond Market? BofA Hartnett's Latest Warning

By Dong Jing, WallstreetCN

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

On July 27, Bank of America's Chief Investment Strategist Michael Hartnett issued a warning in the latest Flow Show report: the yield on 30-year US Treasury bonds rose to 5.2%, the highest level since June 2007, real yields touched a peak of 3% since November 2008, and US technology bond prices fell to a two-year low—the tightening of financial conditions is surpassing the support of corporate earnings for the market.

Hartnett's core judgment is: pressure in the bond market will not dissipate on its own, but may instead force the Federal Reserve to raise interest rates, and rate hikes are exactly what the stock market least wants to see. He warned that once the bull market combination of "rising bond yields, rising bank stocks" flips to "the higher the yield, the lower the bank stocks", it will become the trigger for a new round of deleveraging in risk assets.

At the same time, credit default swaps (CDS) for hyperscalers have risen to historic highs, and bondholders are voting with their feet, questioning the return logic of the AI capital expenditure frenzy.

The background to this warning is: chip stocks were still sold off after Google and Intel released robust earnings reports; the market's real concern has shifted from "can they make money" to "who will pay the bill"—if the bond market no longer provides funding for the AI feast, where will the funds come from for those sky-high priced memory chips and frontier models with negative returns?

Bond Market Pressure Surpasses Earnings, Financial Conditions Become Core Variable

Hartnett explicitly proposed the core framework of "FCI > EPS" in the report, meaning that the impact of the tightening of Financial Conditions Index (FCI) on the market has exceeded the supporting role of Earnings Per Share (EPS).

The nominal yield on 30-year US Treasury bonds reached 5.2%, the highest since June 2007; real yields rose to 3%, the highest since November 2008; US technology bond prices fell to a two-year low. The combination of these three indicators means that the market's financing costs are systematically rising, and this pressure has not yet been fully priced in by stock investors.

Hartnett pointed out that there have been 23 central bank rate hikes globally so far in 2026, and Bank of America expects another 18 before the end of the year. More noteworthy is that the implied probability of a rate hike at the Federal Reserve's July 29 monetary policy meeting has risen to 38%, and a rate hike is fully priced in for the September 16 meeting. He even threw out a provocative judgment in the report:

"Politically, isn't it smarter for the Federal Reserve to raise rates this week than to wait until September?"

Hartnett's logic chain points to a paradoxical outcome: pressure in the bond market may instead force the Federal Reserve to stabilize long-term interest rates by raising rates. He believes that the resolution of this situation can only rely on the Federal Reserve raising rates to suppress the disorderly rise in long-term yields.

However, rate hikes are not good news for the stock market. Hartnett warned that close attention needs to be paid to whether the bull market combination of "rising yields, rising bank stocks" flips to "the higher the yield, the lower the bank stocks"—once flipped, it will become a trigger for deleveraging of risk assets. In this scenario, he believes going long on the US dollar is the best hedging tool to deal with the Federal Reserve's hawkish stance.

He also pointed out that stock investors currently do not view interest rate levels as a threat to the "Anything But Bonds" bull market, but if the pro-market Trump administration tolerates rate hikes to "hit the brakes" on the stock market and anti-billionaire sentiment, the market will suffer a huge negative impact.

Hyperscaler Credit Risk Hits Record High, AI Capital Expenditure Logic Questioned

The most direct manifestation of bond market pressure is the sharp deterioration of credit risk indicators for hyperscalers. According to the report, credit spreads for the hyperscaler group have widened significantly, CDS have risen to historic highs, and concessions on bond issuances are continuing to expand.

The root of this phenomenon lies in the market's questioning of the return on investment (ROI) of AI capital expenditures. Google and Tesla are regarded as benchmark enterprises for "capital expenditure return rates"; although Google and Intel's earnings reports last week were robust, chip stocks were still sold off. The core question raised by the market is:

If bondholders are no longer willing to pay for the AI feast, those frontier models and memory chip demands that highly rely on continuous capital investment will face the risk of a funding cutoff.

Hartnett previously echoed the judgment of Goldman Sachs' top derivatives trader Brian Garrett—the real risk of AI stocks lies not within the stock market itself, but in the bond market. Garrett has warned for two consecutive weeks that pain in the credit market will intensify, and pointed out that the S&P 500 Index is increasingly difficult to represent the performance of ordinary stocks, and internal market differentiation (low correlation, high dispersion) is intensifying.

In addition, Hartnett regards "blue-collar semiconductors"—namely Texas Instruments, Analog Devices, NXP, Microchip, ON, STMicroelectronics, Infineon, Monolithic Power—as leading indicators of the industrial cycle. This combination has cumulatively fallen 21% since the high in June.

At the same time, hyperscale tech giants (MAGS) are struggling to hold the 200-day moving average ($65) support level, which challenges the "boom" consensus generally held by the market. Bank of America's July fund manager survey shows that investors' overweight level on industrial stocks is the highest since July 2021.

In response to the above signals, Hartnett's short-term trading advice is: go long on defensive stocks, high-dividend stocks, and long-duration bonds; go short on bank stocks (recent large capital inflows), broker stocks, tech stocks, and industrial stocks, to cope with the reversal of "boom" expectations.

Bond and Stock Supply Under Dual Pressure, Gold and Bitcoin Quietly Bottoming

From a more macro perspective, Hartnett characterizes the 2020s as an era of: the rise of political populism, globalization giving way to national security, fiscal excess shifting to AI capital expenditure excess, Federal Reserve independence compromising to politics, and American exceptionalism evolving towards global rebalancing.

Against this background, "supply" rather than "demand" has become the main driver of the macro economy and the market. This is specifically reflected in three levels:

Immigration controls compress labor supply (US initial jobless claims fell to the lowest since 1969); protectionism and tariffs restrict import supply (US plans to impose new tariffs on 60 trade partners); geopolitical disturbances disrupt oil supply (of the global approximately 8 billion barrels/day of seaborne oil, approximately 6.4 billion barrels pass through fragile chokepoints such as the Strait of Hormuz and the Bab el-Mandeb Strait).

In contrast, constraints on bond supply and stock supply are loosening. The US government still maintains an annual fiscal deficit of $2 trillion, with annual interest expenditures reaching $1 trillion; even if tariff revenue reached $250 billion in the past 12 months, it is difficult to make up the gap. Companies with negative free cash flow reduce stock buybacks, further compressing stock supply support.

Against this background, Hartnett believes gold and Bitcoin are quietly bottoming out in 2026, while the bank stock index representing "Main Street" will outperform the broker and private equity indexes representing "Wall Street" in the second half of the 2020s.

In addition, he also lists Hong Kong real estate stocks as one of the most attractive long-term buying opportunities—these stocks are currently priced at the same level as 30 years ago; he stated he will buy the dip in any decline triggered by Federal Reserve tightening or a Bank of Japan exchange rate crisis.