Michael Hartnett, Chief Investment Strategist at Bank of America, pointed out in his latest report that the formation of a market top is a slow fermentation process rather than an instantaneous event.
He believes that the current market is clearly exhibiting many signs of this process, with core clues including the increasingly strained credit conditions of AI giants, the political pressure on living costs stemming from &#34;Main Street&#34; citizens, and the potential disruptive changes in U.S. tariff policies. Hartnett incisively noted: &#34;The top is a process, the bottom is a moment.&#34;
Recent dynamics show that the financing model of &#34;super-scale enterprises&#34; in AI is facing severe tests. These tech giants are flooding into the bond market on an unprecedented scale to support their massive capital expenditure arms race, directly leading to a significant widening of their credit spreads.
Hartnett pointed out that this change is a key signal he previously warned about regarding the &#34;AI bubble&#34; that is &#34;worth monitoring,&#34; indicating that the market's sustainability assessment of the AI story is shifting from equity euphoria to a more cautious credit risk evaluation.
At the same time, two other forces are brewing that may reshape the market landscape. First, recent election results in the U.S. revealed voters' strong dissatisfaction with &#34;affordability&#34; issues, and this &#34;Main Street anger&#34; suggests that the government may increase intervention to control prices, thereby squeezing corporate profits. Second, Hartnett emphasized that the U.S. Supreme Court's potential overturning of current tariff rulings could become an important variable affecting the market, possibly weakening inflation expectations and bringing structural opportunities to emerging markets.
Overall, these signals from the credit market, political winds, and policy changes collectively form Hartnett's core argument that &#34;the top is a process.&#34; Although he believes that the &#34;exit&#34; signal triggering a large-scale sell-off has not yet appeared, a series of complex early warning indicators have already lit up, urging investors to remain highly vigilant and reassess asset allocation.
<h2>Cracks in the AI Bubble: Observing Credit Tightening from Equity Frenzy</h2>
Hartnett clearly pointed out that the prosperity and bubble in the AI sector are entering a new stage, with its vulnerabilities beginning to emerge from the credit side. He observed that the cash flow of AI giants themselves is no longer sufficient to support their aggressive capital expenditure plans, forcing them to turn to the bond market for financing. In the past seven weeks, related companies have issued up to $120 billion in bonds, with some industry leaders even suggesting the need for government guarantees to lower capital costs.
The market's reaction has been direct. According to a report from Bank of America, the bond spreads of super-scale enterprises have widened from 50 basis points in September to nearly 80 basis points, indicating that the low point of spreads has passed and investor risk aversion is heating up. Hartnett warned that this resembles the situation before the bursting of the internet bubble in 2000—during the 12 months leading up to the market peak in March 2000, U.S. tech bond prices fell by 8%.
Although Hartnett believes that the timing for a comprehensive short of the stock market has not yet arrived since the Federal Reserve has not raised interest rates, he has turned his attention to the bonds of AI giants, considering shorting super-scale enterprise bonds to be a better strategy at present
He even predicts that when the next round of quantitative easing arrives, &#34;you will see the Federal Reserve purchasing bonds from large-scale AI companies.&#34;
<h2>&#34;The Politics of the Middle Class&#34;: When Wall Street's Prosperity Meets Main Street's Anger</h2>
Political factors are becoming a key variable influencing market direction. Hartnett analyzes in his report that Trump's approval rating has dropped to 43%, particularly performing poorly on economic (41%) and inflation (36%) issues. This makes controlling inflation and the budget deficit crucial by 2026.
More direct evidence comes from recent elections. The Democratic Party has won in places like California, Virginia, New Jersey, and New York City, where voters' top concern is &#34;affordability.&#34; Hartnett interprets that prosperity and bubbles are rarely the best ways to address inflation and inequality. Main Street's anger over the cost of living is sending a clear signal to Wall Street: &#34;You cannot let the market overheat, as higher stock prices may mean fewer votes.&#34;
He expects this political pressure to prompt the government to shift from the &#34;invisible hand&#34; to the &#34;visible fist,&#34; intervening more directly in the prices of energy, healthcare, housing, and even utilities (due to the surge in electricity demand caused by AI), which will negatively impact the profit margins of related industries.
<h2>Policy Shift: The Twilight of Tariffs and the Dawn of Emerging Markets?</h2>
On the policy front, a potentially market-disrupting event is approaching. Currently, investors favor stocks that provide the U.S. with &#34;national security,&#34; such as large tech stocks, semiconductors, and the aerospace and defense sector. However, Hartnett warns that if the U.S. Supreme Court ultimately rules to overturn current tariffs—which he believes is the most likely outcome—the market logic will face reconstruction.
A shift in tariff policy will trigger a series of chain reactions: first, the U.S. government's ability to leverage technology as a tool of global influence 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, one-year inflation expectations in the U.S. have risen from 2.6% to 3.4%, while the ISM services price index has also reached a three-year high.
Hartnett reiterates his previous view that going long on emerging markets (EM) is the best way to trade the &#34;peak tariffs&#34; theme.
<h2>The &#34;K-shaped&#34; Pressure of the Economy: Cooling Employment and Recession Hedging</h2>
Finally, Hartnett turns his attention to the increasingly weak U.S. labor market, viewing it as a manifestation of the deepening &#34;K-shaped&#34; divergence in the economy. Multiple data points indicate that the job market is rapidly cooling: Challenger's report shows that the number of layoffs has exceeded 1 million year-to-date, the highest since 2020; ADP's employment growth over the past three months has been only 3,000; and the unemployment rate for recent graduates has soared from 4% in 2023 to 8%.
Although 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 those in the middle of the &#34;K&#34; feel &#34;poorer rather than richer.&#34;
In the face of these potential recession signals, Hartnett's best hedging advice is to go long on zero-coupon bonds.

Bank of America strategist Michael Hartnett pointed out that the market top is slowly forming through three major signals: the credit spread of AI giants has widened from 50 basis points to 80 basis points, indicating a deteriorating financing environment; public dissatisfaction with the cost of living has triggered political pressure, which may lead to government intervention in prices; the Supreme Court may overturn current tariffs, which, if realized, would weaken inflation expectations and benefit emerging markets. Although there are no comprehensive sell signals, it is recommended to short AI corporate bonds and go long on zero-coupon bonds as a hedge

- Michael Hartnett, Chief Investment Strategist at Bank of America, argues that market tops form gradually, evidenced by tightening credit conditions for AI giants and political pressures from rising living costs.  
- He highlights that the recent surge in bond issuance by these companies indicates a shift from equity exuberance to cautious credit risk assessment, with potential impacts from upcoming U.S. tariff policy changes.  
- Hartnett warns investors to remain vigilant as early warning signs of a market shift emerge, suggesting that shorting large-cap corporate bonds may be a prudent strategy.

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Regarding "AI bubble," "selective politics," and "overturning tariffs," from Bank of America Hartnett's judgment, he said, "The top is a process, while the bottom is a moment."