Breakthrough or collapse? BofA's Hartnett: U.S. stocks and other risk assets face a critical moment, focusing on "three major leading indicators"

When the S&P 500 index is approaching the 6,000-point mark again, while the 10-year treasury yield stubbornly remains high, Bank of America's chief investment officer Michael Hartnett issued a warning: the answer to the breakthrough or collapse of risky assets such as US stocks lies in three key indicators. Hartnett explicitly pointed out in the latest Flow Show report that brokerage stocks, bank stocks, and bitcoin, these three "B" class assets will become the best "signal lights" to judge the market direction. If these three major risk-leading assets show a double top formation, it will release a "extremely bearish" signal; on the other hand, if they cleanly break through upwards, it means "extremely bullish". This judgement is not unfounded. Just a week ago, Bank of America strategists recommended buying long-term bonds, especially 30-year treasury bonds - calling it time to purchase "humiliated" assets, and indeed, 30-year treasury bonds have risen. However, almost all assets are rising, the S&P 500 index recorded its best single-month performance of this century in May, soaring by 6%, achieving its best May performance since 1990. In stark contrast to the frenzy of risky assets, the US dollar "cannot seem to rise, and the market is starting to "whisper the US dollar entering a bear market." Hartnett warned that a weak US dollar will be a future tool to "make American manufacturing great again" - currently, manufacturing only accounts for 8% of US employment. This trend, combined with doubts about the independence of the Federal Reserve, will lead to a bear market in the US dollar, thereby driving up gold, emerging markets, and international assets. Faced with the imminent major changes, both bulls and bears have started to position themselves. Hartnett stated that bearish investors are preparing for a collapse by allocating defensive healthcare, essential consumer goods, and utility stocks - these sectors currently only account for 18% of the S&P 500 index, the lowest level since 2000. Bullish investors are using a barbell strategy by "longing the seven tech giants and other regional value stocks, to hedge against a possible bubble top in the US market and the risks of excessive fiscal spending in the EU. The latest fund flow data further confirms the market's sentiment of differentiation. Cryptocurrency recorded $2.6 billion in inflows this week, marking the largest single-week inflow since January. Other noteworthy fund flows include: Gold: $1.8 billion inflow this week, with an annualized inflow scale reaching a record $75 billion Emerging market bonds: the largest inflow since January 2023 ($2.8 billion) Global stocks: the largest outflow since 2025 ($9.5 billion) Japanese stocks: the largest outflow ever ($11.8 billion) Although Hartnett still recommends allocating to the BIG combination (bonds, international stocks, gold) in 2025, he also acknowledges significant risks: US policymakers may turn to a policy of "we need a bigger bubble" by lowering tariffs, tax cuts, and interest rate reductions to stabilize the debt/GDP ratio. The seven tech giants are once again performing exceptionally well, with a trading P/E ratio returning to 42 times. Historical data shows that stock market bubbles since 1900 usually peak at a P/E ratio of 58 times and a 244% increase, indicating that the seven tech giants still have a 30% upside. More worrisome is that in 12 out of the past 14 asset bubbles, rising bond yields have accompanied them. Currently, the US 30-year real interest rate is close to 3%, the highest level since November 2008 - "there is nothing that can explain the existence of a bubble more than stocks driving nominal/real yield increases". The market's crucial moment is approaching, investors need to closely monitor the performance of those three "B" indicators, which will ultimately reveal the direction of this financial game. This article is reprinted from "Wall Street View", author: Xu Chao; GMTEight Editor: Yan Wencai.