--- title: "The Biggest Enemy of the AI Bull Market: Not a Bubble, but the Bond Market? Bank of America's Hartnett Issues Latest Warning" type: "News" locale: "en" url: "https://longbridge.com/en/news/293889541.md" description: "Hartnett believes the bond market is becoming the greatest threat to the AI bull market. The 30-Year Treasury Yield has risen to 5.2% (the highest since 2007), with real yields reaching 3%. Tightening financial conditions have outpaced the support provided by corporate earnings. Meanwhile, credit default swaps (CDS) for hyperscale cloud service providers have hit record highs, as bondholders question the return logic behind AI capital expenditures. If the bond market stops providing funding and forces the Federal Reserve to raise interest rates, it could trigger a new round of deleveraging in risk assets" datetime: "2026-07-27T06:42:07.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/293889541.md) - [en](https://longbridge.com/en/news/293889541.md) - [zh-HK](https://longbridge.com/zh-HK/news/293889541.md) --- # The Biggest Enemy of the AI Bull Market: Not a Bubble, but the Bond Market? Bank of America's Hartnett Issues Latest Warning The bond market is becoming the most dangerous variable in the AI bull market. On July 27, Michael Hartnett, Chief Investment Strategist at Bank of America, issued a warning in the latest edition of his Flow Show report: **the 30-Year Treasury Yield rose to 5.2%, its highest level since June 2007**; **real yields touched a peak of 3%, the highest since November 2008, while US technology bond prices fell to two-year lows**—indicating that the tightening of financial conditions is surpassing the support provided by corporate earnings. Hartnett’s core judgment is that **pressure in the bond market will not dissipate on its own; instead, it may force the Federal Reserve to raise interest rates, which is precisely the outcome the stock market fears most.** He warned that if the bullish combination of "rising bond yields and rising bank stocks" flips to "the higher the yields, the lower the bank stocks," **it will become the trigger for a new round of deleveraging in risk assets.** Meanwhile, credit default swaps (CDS) for hyperscale cloud computing companies (hyperscalers) have risen to historic highs, with **bondholders voting with their feet and questioning the return logic behind the frenzy of AI capital expenditures.** The background to this warning is that **chip stocks were sold off even after Google and Intel released robust earnings reports.** The market’s true concern has shifted from "can they make money" to "who will foot the bill." If the bond market no longer funds the AI feast, where will the capital come from for sky-high-priced memory chips and frontier models with negative returns? ## Bond Market Pressure Outpaces Earnings, Financial Conditions Become the Core Variable Hartnett explicitly proposed the core framework "FCI \> EPS" in his report, meaning that the impact of tightening financial conditions (Financial Conditions Index) on the market has exceeded the supporting role of corporate earnings (EPS). **The nominal yield on 30-Year Treasuries reached 5.2%, the highest since June 2007; real yields rose to 3%, the highest since November 2008; and US technology bond prices fell to two-year lows.** The combination of these three indicators means that market financing costs are rising systematically, a pressure that has not yet been fully priced in by equity investors. Hartnett pointed out that there have already been 23 central bank rate hikes globally in 2026 so far, and Bank of America expects another 18 before the end of the year. More notably, the implied probability of a rate hike at the Federal Reserve’s July 29 meeting has risen to 38%, while a hike at the September 16 meeting is already fully priced in. He even offered a provocative judgment in his report: > "Politically speaking, it would be smarter for the Fed to raise rates this week rather than wait until September, wouldn't it?" Hartnett’s logical chain points to a paradoxical outcome: **pressure in the bond market may instead force the Federal Reserve to stabilize long-term interest rates through rate hikes.** He believes that resolving this situation can only rely on the Fed raising rates to curb the disorderly rise in long-term yields. However, rate hikes are not good news for the stock market. Hartnett warned that **investors need to closely monitor whether the bullish combination of "rising yields and rising bank stocks" flips to "the higher the yields, the lower the bank stocks."** Once this flip occurs, it will become a trigger for deleveraging in risk assets. In this scenario, he believes that going long on the US dollar is the best hedge against the Federal Reserve’s hawkish stance. He also noted that equity investors currently do not view interest rate levels as a threat to the "Anything But Bonds" bull market. However, if the pro-market Trump administration tolerates rate hikes to "put the brakes" on the stock market and anti-billionaire sentiment, the market will suffer significant negative impacts. ## Credit Risk for Hyperscale Cloud Providers Hits Records, AI CapEx Logic Questioned The most direct manifestation of bond market pressure is the sharp deterioration in credit risk indicators for hyperscale cloud computing companies. According to the report, credit spreads for the hyperscaler group have widened significantly, CDS have risen to historic highs, and concessions on bond issuances continue to expand. The root cause of this phenomenon lies in market doubts about the return on investment (ROI) of AI capital expenditures. Google and Tesla are regarded as benchmark companies for "capital expenditure returns." Despite robust earnings reports from Google and Intel last week, chip stocks were still sold off. The core question raised by the market is: > If bondholders are no longer willing to foot the bill for the AI feast, frontier models and memory chip demand, which heavily rely on continuous capital input, will face the risk of a funding rupture. Hartnett previously echoed the judgment of Brian Garrett, a top derivatives trader at Goldman Sachs—that the true risk for AI stocks lies not within the stock market itself, but in the bond market. Garrett had warned for two consecutive weeks that pain in the credit market would intensify, pointing out that **the S&P 500 Index is increasingly failing to represent the performance of ordinary stocks, as market internal divergence (low correlation, high dispersion) is intensifying.** Additionally, Hartnett views "blue-collar semiconductors"—namely Texas Instruments, Analog Devices, NXP, Microchip Technology, ON Semiconductor, STMicroelectronics, Infineon, and Monolithic Power Systems—as leading indicators of the industrial cycle. This portfolio has cumulatively fallen 21% since its June highs. Meanwhile, mega-cap tech giants (MAGS) are struggling to hold the support level of their 200-day moving average ($65), challenging the widely held consensus of "prosperity." Bank of America’s July fund manager survey showed that investors’ overweight position in industrial stocks is at its highest level since July 2021. In response to these signals, Hartnett’s short-term trading advice is: **go long on defensive stocks, high-dividend stocks, and long-duration bonds; go short on bank stocks (which have seen significant recent inflows), brokerage stocks, technology stocks, and industrial stocks, to prepare for a reversal of "prosperity" expectations.** ## Dual Pressure on Bond and Equity Supply, Gold and Bitcoin Quietly Bottoming Out From a broader macro perspective, Hartnett characterizes the 2020s as an era defined by: **the rise of political populism, national security replacing globalization, fiscal excess shifting to AI capital expenditure excess, the Federal Reserve’s independence compromising to politics, and American exceptionalism evolving toward global rebalancing.** In this context, "supply" rather than "demand" has become the main driver of macroeconomics and the market. This is reflected in three specific areas: > Immigration controls are compressing labor supply (US initial jobless claims have fallen to their lowest level since 1969); protectionism and tariffs are restricting import supply (the US plans to impose new tariffs on 60 trading partners); and geopolitical disturbances are disrupting oil supply (of the approximately 8 billion barrels per day of seaborne oil globally, about 6.4 billion barrels pass through vulnerable chokepoints such as the Strait of Hormuz and the Bab el-Mandeb Strait). > > In contrast, constraints on bond and equity supply are loosening. The US government continues to maintain an annual fiscal deficit of $2 trillion, with annual interest expenses reaching $1 trillion. Even tariff revenues of $250 billion over the past 12 months are insufficient to cover the gap. Companies with negative free cash flow are reducing stock buybacks, further compressing support from equity supply. In this context, Hartnett believes that gold and Bitcoin are quietly bottoming out in 2026, while the bank stock index, representing "Main Street," will outperform the brokerage and private equity indices, representing "Wall Street," in the second half of the 2020s. Furthermore, he lists Hong Kong real estate stocks as one of the most attractive long-term buying opportunities. These stocks are currently priced at levels seen 30 years ago, and he stated he would buy on any dips caused by Federal Reserve tightening or exchange rate crises triggered by the Bank of Japan. ### Related Stocks - [BAC.US](https://longbridge.com/en/quote/BAC.US.md) - [SOXL.US](https://longbridge.com/en/quote/SOXL.US.md) ## Related News & Research - [Bank of America Just Raised Its Dividend 14%. The Buyback Is the Bigger Story.](https://longbridge.com/en/news/293821956.md) - [Primis AI Becomes ChipNexus and Launches NEX for Agentic Chip-Design Automation](https://longbridge.com/en/news/293657601.md) - [Building a Better Bull Strangle Portfolio – Part 7: Trend Structure: Why the Best Stocks Aren't Always the Strongest Charts](https://longbridge.com/en/news/293826501.md) - [AI's new North Star: Intelligence per dollar](https://longbridge.com/en/news/293823098.md) - [Cattle Look to React to Border Reopening News on Monday Morning](https://longbridge.com/en/news/293933971.md)