Strategist Michael Hartnett from Bank of America has issued a new warning: as the Trump administration pushes a policy mix aimed at "overheating the economy" combined with tariff shocks, global capital is fleeing dollar-denominated assets at an unprecedented pace, initiating a structural rotation across asset classes.

According to the Flow Show report, since the start of 2026, developed market funds in regions like Europe and Japan have attracted $104 billion in inflows, while US funds have seen only $25 billion during the same period. This four-fold disparity reflects how the notion of "American exceptionalism" is being replaced by a "global rebalancing."

Hartnett argues that investment logic is undergoing a fundamental reconstruction. US stocks, particularly tech giants, are no longer the sole safe havens, as capital begins to diversify into emerging markets, commodities, and international equities. This trend is not a short-term tactical adjustment but an early pricing-in of a "new world order."

From an allocation perspective, the report advises investors to reduce exposure to US large-cap growth stocks and increase holdings in real assets (such as gold and oil), emerging market equities, and US small-cap value stocks to counter the declining relative appeal of dollar assets.

The report links this shift to the Trump administration's historic tariff policies introduced in April. Although some measures were later withdrawn, market confidence has suffered an irreversible impact. Hartnett characterizes the current trading logic as the "Anything But Dollar" (ABD) trade, driven by structural repricing spurred by policies designed to "overheat the economy."

Data supports this view. The US Dollar Index has fallen 10% since late 2024. US equities have underperformed relatively: while the S&P 500 has gained 15% over the same period, the MSCI World ex-US Index has surged 39%, highlighting a significant performance gap.

Year-to-date asset performance further reveals the rotation pattern. Gold has risen 13.4% and oil is up 9.5%, leading the pack; meanwhile, US stocks have edged down 0.2%, the dollar has fallen 1.4%, and Bitcoin has plunged 24%, marking them as clear losers in this rotation. Hartnett emphasizes this is not a cyclical short-term fluctuation but the beginning of a "new world order," with global capital accelerating its migration from dollar assets towards real assets, emerging markets, and international stocks.

Fund flows are providing the clearest evidence for Hartnett's "global rebalancing" thesis. Since the start of 2026, developed market equity funds in Europe and Japan have attracted a cumulative $104 billion in inflows, compared to just $25 billion for US funds. The former's inflow is over four times larger, confirming the trend of capital accelerating its exit from dollar assets.

Specific market highlights are emerging. South Korean equities recorded their strongest four-week inflow since 2002, totaling $14.3 billion; the infrastructure sector also saw its best fund attraction since 2007. While tech stocks still see inflows, Hartnett warns that the risk of a rotation from "AI panic to AI poverty" is building, with a potential trigger being hyperscale cloud providers announcing cuts to capital expenditure.

Another key signal comes from Bank of America's private clients. In the first week of February, they pulled money from cash and US Treasuries at the fastest pace in 14 years, simultaneously moving into municipal bonds, investment-grade bonds, and Japanese stock ETFs, indicating that domestic capital is also following a "de-dollarization" allocation logic.

By examining market history over the past 50 years, Hartnett outlines a clear pattern: major political and geopolitical events consistently trigger changes in asset leadership. Looking at 2026, he believes a new rotation has begun.

Historical reviews show that each institutional turning point reshaped capital flows. The collapse of the Bretton Woods system in 1971 crowned real assets, sending gold soaring; Paul Volcker's rate hikes in 1980 launched a four-decade bond bull market; the fall of the Berlin Wall in 1989 boosted US stocks via globalization; China's WTO accession in 2001 brought prosperity to emerging markets and commodities; the QE era starting in 2009 ushered in a golden period for US growth and tech stocks; the 2020 pandemic and fiscal expansion pushed the "Magnificent Seven" and Bitcoin to bubble peaks.

Now, Hartnett proposes the core prediction for the next decade: emerging markets and small-cap stocks will take the baton.

The logical chain clearly points in two directions. First, the shift from Wall Street to Main Street, where populism replaces elitism and isolationism replaces globalization, will structurally benefit small-cap value stocks over large-cap growth stocks. Second, the move from the US to emerging markets, as the end of "American exceptionalism" drives capital towards undervalued Asia-Pacific regions.

The continued deterioration of US fiscal conditions is becoming a core pillar of the "short dollar" trade. Data shows US national debt is surging uncontrollably, increasing by $1 trillion every 100 days. According to Congressional Budget Office projections, the US annual interest expense will soar from $1 trillion to $2.1 trillion over the next decade.

Hartnett points out that the increasingly heavy interest burden may eventually force the US government to implement Yield Curve Control, meaning a weak dollar would become a standard policy outcome.

In this context, Hartnett reiterates that long-term Treasury bonds are the most certain risk hedge for 2026. The core logic is that the US government will not allow the 30-year bond yield to breach the 5% psychological policy threshold, giving long bonds the dual advantages of safe-haven attributes and policy support.

Despite accelerating outflows from the US, market sentiment remains extremely exuberant. The latest reading of the BofA Bull & Bear indicator is 9.4. Although slightly down from the previous 9.6, it remains significantly above the sell threshold of 8, sending a clear contrarian warning signal.

The report states that neutralizing this sell signal requires meeting three conditions: a significant rise in cash levels, large-scale covering of bond shorts, and tech stock positioning falling to a neutral range. Currently, the market clearly hasn't reached any of these thresholds.

Hartnett concludes that the 2026 trading script is clearly written, with the leading roles going to inflation hedges, real assets, emerging markets, and non-US currencies. For investors still heavily concentrated in US tech giants and dollar cash, it is time to reassess their asset allocation clocks.