BofA's Hartnett: Small-cap stocks are more worth betting on than tech stocks, tech giants are no longer the winners.

When Wall Street's "Bull & Bear Indicator" soared to its highest level since 2006, every movement in the market was filled with a dangerous taste. One month ago, Bank of America's Chief Investment Strategist Michael Hartnett redesigned this indicator and issued a clear "sell" signal. As of now, the indicator has further climbed to 9.6 - an extreme reading not seen since March 2006. Hartnett's analysis suggests that this is a product of the triple overlap of "peak positioning, peak liquidity, and peak inequality". For asset allocation in 2026, Hartnett's conclusion is simple yet harsh: "long Main St, short Wall St". In other words, funds should be withdrawn from crowded tech giants and cryptocurrencies, and redirected to small-cap stocks and international markets that benefit from the economic recovery. Warning from the "Bull & Bear Indicator" The path of this market correction has accurately confirmed Hartnett's warning. At the end of January, the market suddenly crashed, software stocks recorded record-breaking declines for 8 consecutive days, followed by a panic spreading like a contagion: silver prices collapsed, Bitcoin saw the largest drop since the FTX scandal, and degrossing by multi-strategy funds led to urgent basis trading. Ultimately, as Google (GOOGL) and Amazon (AMZN) saw their stock prices plummet due to capital spending guidance, this chill thoroughly pierced the semiconductor sector and the "Magnificent Seven" (Mag 7). It is worth mentioning that the catalyst for this crash has a highly political color. Hartnett points out that Trump mentioning Kevin Warsh (seen by the market as a hawkish figure) as a nominee directly triggered a 30% weekly drop in Bitcoin. Since October 2025, the cryptocurrency market has evaporated $2 trillion in market value, equivalent to 10% of US consumer spending. Hartnett warns that the reversal of this wealth effect will substantially impact the economy in the coming months. The "Capital Spending Trap" of Big Tech Why are former safe havens - Big Tech - no longer safe? The core lies in the drastic changes in their balance sheets. The market expects that Big Tech's AI-related capital spending (Capex) in 2026 will reach $670 billion, equivalent to 96% of their combined cash reserves. In comparison, this ratio was only 40% in 2023 ($150 billion). This means that Big Tech is rapidly shifting from a "light asset" to a "heavy asset" model. They no longer have the best balance sheets, nor do they have unlimited stock buyback capabilities. This fundamental shift in business models represents the greatest threat to the dominance of tech stocks in the 2020s. In stark contrast is the logic of "Main St". Hartnett believes that the Trump administration, in response to voter dissatisfaction with living costs, will lower inflation by intervening in energy, healthcare, credit, and electricity prices. This policy direction, combined with AI's cooling effect on the labor market, will unexpectedly lower inflation in 2026, benefiting small-cap and mid-cap stocks. Reality has already begun to validate this logic: since the new government took office, "Bro Billionaire plays" represented by NVDA, META, and Bitcoin have only risen by 6%, while small-cap stocks have risen by 13% during the same period. Large-scale fund movements: escaping bubbles, seeking undervalued assets The latest EPFR data shows a drastic style shift in the market: Safe-haven assets falling out of favor: gold funds saw their first weekly net outflow since November 2025 ($800 million), while cryptocurrency funds saw outflows of $1.5 billion. This seems to declare that the $70 billion of funds that poured into cryptocurrency ETFs since the election never existed. Value areas attracting funds: funds are pouring into undervalued markets. The South Korean stock market recorded its largest weekly inflow of $5.2 billion, while the European stock market saw its largest inflow since April 2025. Bullish bond market: Investment-grade bonds (IG bonds) have seen 41 consecutive weeks of net inflows. Hartnett reminds investors to pay attention to key "bubble support levels": $133 for the tech stock ETF (XLK), $58,000 for Bitcoin, and $4,550 per ounce for gold. Hartnett also noted that if no systemic event occurs - such as the US dollar surging (DXY index reaching 100) and a sharp drop in related bond yields - the current decline should be seen as a "huge, healthy, and overdue bubble deflation". Outlook for 2026: Global Rebalancing Looking ahead, we are at a historical turning point similar to 1971, 1989, or 2009. Hartnett believes that 2025-2026 marks the end of the "American exception" and the beginning of a "global rebalancing". In the new cycle, the winners will no longer be American tech giants, but international stocks, Chinese consumer stocks, and commodity producers in emerging markets. For investors, the strategy is clear: amidst the thunder of bursting bubbles, look for those assets that have been long neglected and closely linked to the real economy. This article is reproduced from "Wall Street Seen", authored by Gao Zhimou; edited by GMTEight: Xu Wenqiang.