Regarding the "AI bubble", "picking politics", and "tariff reprisals", according to the judgment of BofA's Hartnett, he said, "Tops are a process, while bottoms are an event."

In his latest report, Michael Hartnett, the chief investment strategist at Bank of America, pointed out that the formation of a market top is a slow brewing process rather than a sudden event. He believes that the current market is clearly showing many signs of this process, including the tightening credit conditions of artificial intelligence giants, political pressure from "Main Street" on the cost of living, and the potential disruptive changes in US tariff policy. Hartnett astutely pointed out, "Tops are a process, bottoms are an event." The latest developments indicate that the financing model of AI "mega-corporations" is facing severe challenges. These tech giants are entering the bond market at an unprecedented scale to support their massive capital expenditure arms race, leading to a significant widening of their credit spreads. Hartnett pointed out that this shift is a key signal of caution regarding the AI bubble he had previously warned about, indicating the market's shift from an equity frenzy towards a more cautious credit risk assessment of the AI story. Meanwhile, two other forces are brewing that may reshape the market landscape. First, the recent election results in the US revealed strong dissatisfaction among voters with the affordability issue, signaling that "Main Street's anger" may lead to government intervention to control prices and squeeze business profits. Secondly, Hartnett emphasized that the US Supreme Court could overturn current tariff rulings, becoming a significant variable impacting the market, potentially dampening inflation expectations and bringing structural opportunities to emerging markets. Overall, these signals from the credit market, political trends, and policy changes form the core arguments of Hartnett's thesis that "tops are a process." While he believes that the "exit" signal triggering a large-scale sell-off has not yet emerged, a series of complex early warning indicators have lit up, demanding investors to remain highly vigilant and reassess their asset allocation. Cracks in the AI bubble: From equity frenzy to credit tightening Hartnett explicitly stated that the prosperity and bubble in the AI sector are entering a new phase, with its vulnerability now evident on the credit side. He observed that the cash flow of AI giants is no longer sufficient to support their aggressive capital expenditure plans, forcing them to turn to debt market financing. In the past seven weeks, these companies have issued up to $120 billion in bonds, with industry leaders even hinting at the need for government guarantees to lower capital costs. The market's reaction has been direct. According to a Bank of America report, the bond spreads of mega-corporations have widened from 50 basis points in September to nearly 80 basis points, indicating that the spread lows are behind us and investor risk aversion is on the rise. Hartnett warned that this resembles the scene before the bursting of the dot-com bubble in 2000 - in the 12 months leading up to the market peak in March 2000, US tech bond prices fell by 8%. While Hartnett believes that the time to go fully short on the stock market has not arrived yet, as the Fed has not raised interest rates, he has turned his focus to AI giants' bonds, believing that shorting mega-corporation bonds is currently a better strategy. He even predicted that when the next round of quantitative easing arrives, "you will see the Fed buying bonds of AI mega-corporations." "The politics of the middle class": when Wall Street's prosperity meets Main Street's anger Political factors are becoming a key variable influencing the market direction. Hartnett analyzed in the report that Trump's approval rating has dropped to 43%, especially performing poorly on economic (41%) and inflation (36%) issues. This makes controlling inflation and budget deficits crucial by 2026. More direct evidence comes from recent elections. The Democratic Party achieved victories in California, Virginia, New Jersey, and New York City, with the most pressing issue for voters being "affordability." Hartnett interpreted this, saying that prosperity and bubbles are rarely the best ways to address inflation and inequality. Main Street's anger towards the cost of living is sending a clear signal to Wall Street: "You cannot let the market overheat because higher stock prices could mean lower votes." He expects this political pressure will prompt the government to shift from the "invisible hand" to the "visible fist" and directly intervene in prices of energy, healthcare, housing, and even utilities (due to an increase in electricity demand caused by AI), negatively impacting profitability of companies in those industries. Policy Shift: Twilight of tariffs and dawn of emerging markets? On the policy front, an event that could disrupt the market landscape is looming. Currently, investors favor stocks that can enhance US "national security," such as large tech stocks, semiconductors, and aerospace defense sectors. However, Hartnett warned that if the US Supreme Court ultimately rules to overturn current tariffs - which he believes is the most likely outcome, market logic will face reconstruction. A shift in tariff policy will bring a series of chain reactions: first, the US government's ability to leverage technology as a global influence tool will be weakened; second, tariff revenues will decline; but more importantly, this move will help lower inflation expectations. Data shows that since Trump's election, the one-year inflation expectation in the US has risen from 2.6% to 3.4%, and the ISM Services Purchasing Managers' Index has reached a three-year high. Hartnett reiterated his previous view that going long on emerging markets (EM) is the best way to trade the "tariff peak" theme. Economic "K-shaped" pressures: Cooling employment and recession hedging Lastly, Hartnett shifts his focus to the increasingly sluggish US labor market, seeing this as a manifestation of the intensifying economic "K-shaped" divergence. Multiple data points show that the jobs market is rapidly cooling: Challenger's report shows that layoffs since the beginning of the year have exceeded 1 million, the highest since 2020; ADP's job growth in the last three months was only 3,000; and the unemployment rate for recent graduates has skyrocketed from 4% in 2023 to 8%. While these data points have not yet reached recession standards, AI-driven structural unemployment is accelerating. Meanwhile, the weakness in the housing construction industry suggests that the group in the middle of the "K" is feeling "poorer rather than richer." Faced with these potential recession signals, Hartnett's top hedge advice is to go long on zero-coupon bonds. This article was originally published on the "Wall Street News" app, written by Ye Huiwen; GMTEight editor: Song Zhiying.