MW Market bubbles only burst when central banks tighten - and there's so sign of that happening, says B. of A. strategist Hartnett

By Jules Rimmer

In his weekly Flow Show update, Bank of America chief strategist Michael Hartnett remains reluctant to call a top in markets

Wall Street is faring better than Main Street in this K-shaped recovery, Bank of America chief strategist Michael Hartnett observes.

Share-price action, equity valuations, portfolio concentration and market speculation are all frothy, while inflation signals are flashing red.

While this all points to an asset bubble, Bank of America's chief strategist, Michael Hartnett, counters by remarking that "every bubble in history [has been] popped by central-bank tightening" and adding that "no central bank in the world has hiked rates in the last two months."

In his weekly target update, called the Flow Show, Hartnett is reluctant to call a top on markets. He has a global flow trading rule, for example, that when inflows into stocks and high-yield bonds exceed 1% of assets under management in a four-week period, then this triggers a call to sell. The last four weeks saw an influx of 0.9% of AUM so he's not obliged to pull that trigger yet.

Ominously, though, Hartnett noticed that, for the past five months, the low on the S&P 500 SPX was recorded on the first day of trading. This hasn't happened since 1928, and most investors will be familiar with what happened a year later.

For now, though, confidence remains undimmed. Published Friday, Flow Show notes global exchange-traded equity funds attracted $152 billion in the past three weeks and money-market fund association assets under management (typically a very conservative place to allocate capital) is only 13% of the S&P 500 market capitalization. It's rarely been lower.

As one might imagine in an environment of rising inflationary fears, Bank of America's private clients appear to have abandoned the traditional 60/40 portfolio model (wherein 60% is devoted to stocks and 40% to fixed income), with respondents to the survey reporting an allocation of 64.7% to equities with just 18% in bonds. With the Fed cutting into what seems, on the face of it, to be an accelerating economy, Hartnett detects that very few asset allocators have significant exposure to duration (assets of a longer-term nature).

To best exploit the current investment trends, Bank of America's strategy team recommends a barbell strategy (typically this involves a portfolio with high- and low-risk elements but fewer investments in the middle of that spectrum) involving resources and AI stocks at one end and commodities at the other. Flow Show emphasizes that AI capital expenditure "devours" commodities.

Need to Know: The AI frenzy is a bubble, this analyst argues - and it's now 17 times the size of the dot-com one

For the time being, Hartnett remains "a secular dollar DXY bear" and also maintains his belief in a K-shaped economic recovery whereby wealthier Americans are faring much better economically than those at the lower end. Citing evidence, he points to the outperformance of stocks associated with high-income consumers, like Ferrari $(RACE)$, as contrasted with those offering exposure to less-well-off consumers, like Dollar General $(DG)$.

"High-income" stocks outperformance of "low-income" stocks.

Equity wealth is at all-time highs, reinforcing the notion, that right now in America, Wall Street is much more robust than Main Street. It's six times bigger by Bank of America's calculations.

U.S. households' exposure to stocks is at all-time high.

-Jules Rimmer

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October 03, 2025 08:49 ET (12:49 GMT)

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