AI bubble, diesel shock, surging yields! BofA's Hartnett warns of approaching autumn stagflation risk

Title context: AI bubble, diesel shock, surging yields! BofA's Hartnett warns of approaching autumn stagflation risk Text: Threefold pressure is converging on the market. Bank of America Chief Investment Strategist Michael Hartnett warned in the latest "Flow Show" report: record diesel prices, the 30-year U.S. Treasury yield surging to its highest since 2007, and productivity concerns masked by the AI boom are together building an autumn stagflation risk. Hartnett identified the transportation ETF (IYT) as the most critical indicator to watch. He noted that if IYT breaks below its 200-day moving average support at 80, it would confirm that the summer macro de-risking signal that the "best time has passed" has officially evolved into an autumn stagflation event. At the same time, he warned that "a calm market plus tough policy is a breeding ground for volatility," and explicitly stated that "it is not too late to hedge against the AI bubble in equities." Fund flow data corroborates the subtle shift in market sentiment. Over the past three weeks, U.S. equities averaged only $7 billion in weekly net inflows, a sharp contraction from the $52 billion peak in July; U.S. stocks even recorded their largest three-week net outflow since January 2026, totaling $14.2 billion. Diesel is the real pressure point Although headlines have focused on crude oil prices returning to $100 per barrel, Hartnett pointed to the diesel market with a greater warning. He explicitly stated in the report that diesel is the "core pressure point of the real economy" shipping, trucking, agriculture, construction, and mining all rely heavily on diesel. The diesel crack spread has now hit a record $102 per barrel, while retail diesel prices have also reached a record high of $6 per gallon. By contrast, crude oil prices remain far below their peak during the Ukraine crisis, and the divergence between the two highlights abnormal pressure on the refining side. Hartnett warned that for industrial America as a whole, this surge in the largest input cost simply cannot be ignored. He set the IYT transportation ETF as the core indicator to watch: the ETF is currently testing its 200-day moving average support at 80, and a decisive break below would officially confirm the autumn stagflation scenario. Yields remain elevated, bond diversification effect fades The 30-year U.S. Treasury yield has risen to its highest level since June 2007, but the broader market still shows no signs of panic. Hartnett cited historical patterns, noting that "markets typically test policy resolve" after the joint U.S.-Japan intervention on July 31, 2026, the yen tested the 160 level before being pushed back below 154; the day after QE3 was announced in 2012, the 30-year U.S. Treasury yield jumped 16 basis points in a single day; and within days after QE4 in 2020, it surged 51 basis points. He also noted that the current "peak yield" trade is working, with long-duration rallies in XBI, KRE, REITs, and small-caps already unfolding ahead of central bank rate hikes, but this rally has not been supported by synchronized fund inflows. On the bond allocation front, Hartnett issued a deeper warning: during the 2000-2019 "secular stagnation" era, bonds were negatively correlated with stocks, and a 2% to 3% yield was almost a bonus; but now the returns of the two asset classes are positively correlated again, and allocators may need higher yields to shift toward bonds on a large scale, with bonds' diversification protection benefit rapidly fading. AI bubble concerns: productivity data sounds the alarm In the report, Hartnett raised his most direct challenge yet to the AI boom. He noted that AI-related investment has accumulated over $1.5 trillion in the past three years, but evidence of economy-wide productivity gains remains scarce total factor productivity (TFP) is falling below its long-term trend line, and this indicator has been highly correlated with consumer confidence over the past 50 years. Another side effect of the AI boom is already visible at the valuation level: the S&P 500's free cash flow yield has been compressed to a historic low. Hartnett's data shows that the high free cash flow stock portfolio (VFLO) has risen 37% year-to-date, outperforming the broader market; in 2022, a typical stagflation year, the portfolio rose 9%, while the S&P 500 ETF (SPY) fell 18% over the same period. His conclusion carries a strong warning: "Sometimes, Main Street knows something Wall Street doesn't." Fund flows: equities lose appeal, bonds and crypto gain favor The latest weekly global fund flow data shows bonds attracted $17.5 billion, cash inflows totaled $12.9 billion, equities drew $9.8 billion, cryptocurrencies brought in $1.3 billion, and gold attracted $600 million. Specifically, global bonds have seen average weekly net inflows of $18 billion for four consecutive weeks; investment-grade bonds recorded their 23rd consecutive week of net inflows, at $5 billion in a single week; Chinese stocks recorded net inflows for the first time in six weeks, at $1.1 billion; the materials sector saw its 10th consecutive week of net inflows, at $1.9 billion; cryptocurrencies accumulated $6.8 billion in net inflows over the past six weeks, showing strong momentum. Hartnett's proprietary sell indicator edged down from 9.6 to 9.5 this week, mainly due to slowing equity inflows and outflows from the healthcare sector. Notably, since the indicator triggered a sell signal on May 2, the S&P 500 has risen 1.0% and the global ACWI index has gained 1.5%, with no significant market correction yet but Hartnett believes this only increases the pressure for subsequent risk release. This article is reprinted from "Wall Street See Hear," author: Zhao Ying; GMTEight editor: Chen Siyu.