The biggest enemy of the AI bull market isn't a bubble, but the bond market?
- Core Thesis: Bank of America's chief strategist warns that surging US Treasury yields and tightening financial conditions have surpassed corporate earnings as the core market risk; this could force the Fed to raise rates, triggering deleveraging in tech stocks and AI-related assets, while credit risk for hyperscale cloud providers hits record highs, questioning the return logic of AI capital expenditure.
- Key Factors:
- The 30-year US Treasury yield has risen to 5.2% (highest since June 2007), with the real yield reaching 3% (highest since November 2008). US tech bond prices have fallen to a two-year low, and tightening financial conditions have become the market's primary contradiction.
- The CDS spreads for hyperscale cloud providers have hit an all-time high, as bondholders question the return on AI capital expenditure. Even with solid earnings reports from Google and Intel, semiconductor stocks are being sold off.
- The report proposes an "FCI > EPS" framework, suggesting that the impact of financial conditions on the market has surpassed support from corporate earnings. The implied probability of a Fed rate hike in July stands at 38%, and a rate increase could reverse the bull market thesis.
- "Blue-collar semiconductor" stocks (e.g., Texas Instruments) have fallen 21% from their June highs, signaling a weakening leading indicator for the industrial cycle. Hyperscale tech giants are struggling to hold the key 200-day moving average support level.
- On a macro level, supply has become the driving force in the 2020s, including constraints on labor, imports, and oil supply, while an increase in the supply of bonds and stocks puts pressure on capital.
- Gold and Bitcoin are quietly bottoming out in 2026; the bank stock index is expected to outperform brokerages and private equity indices in the latter half of the 2020s.
Original author: Dong Jing
Original source: Wall Street CN
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 Flow Show report: The 30-year US Treasury yield rose to 5.2%, its highest level since June 2007, while the real yield hit 3%, a peak not seen since November 2008, and US tech bond prices fell to two-year lows — the tightening of financial conditions is beginning to outweigh the support corporate earnings provide to the market.
Hartnett's core thesis is: The pressure in the bond market will not dissipate on its own; instead, it may force the Fed into a rate hike, which is precisely the outcome the stock market least desires. He warns that if the bullish combination of "rising bond yields and rising bank stocks" reverses into "higher yields, lower bank stocks," it could become the trigger for a new round of deleveraging in risk assets.
At the same time, the credit default swaps (CDS) of hyperscalers have surged to all-time highs, as bondholders are voting with their feet, questioning the return logic of AI's capital expenditure frenzy.
The backdrop to this warning is: Chip stocks were sold off even after Google and Intel released solid earnings, as the market's real concern has shifted from 'can they make money' to 'who will foot the bill' — if the bond market stops funding the AI feast, where will the money come from for those exorbitantly priced memory chips and frontier models with negative returns?
Bond Market Pressure Outweighs Earnings; Financial Conditions Become the Core Variable
In his report, Hartnett clearly proposes the core framework of "FCI > EPS," suggesting that the impact of tightening financial conditions (Financial Conditions Index) on the market has surpassed the supportive role of corporate earnings (EPS).
The nominal yield on the 30-year US Treasury has reached 5.2%, the highest since June 2007; the real yield has risen to 3%, the highest since November 2008; and US tech bond prices have fallen to two-year lows. The combination of these three indicators means that the cost of financing in the market is systematically rising, a pressure that stock investors have yet to fully price in.
Hartnett notes there have been 23 central bank rate hikes globally so far this year, with Bank of America expecting 18 more before the end of the year. More notably, the implied probability of a rate hike at the Fed's July 29 meeting has risen to 38%, while the September 16 meeting is fully pricing in one hike. He even throws out a provocative judgment in the report:
"Politically, wouldn't it be smarter for the Fed to raise rates this week rather than waiting until September?"
Hartnett's logic chain points to a paradoxical outcome: The pressure from the bond market may, in fact, force the Fed to raise rates to stabilize long-term yields. He believes that resolving this situation can only be achieved through the Fed hiking rates to curb the disorderly rise in long-end yields.
However, a rate hike is not good news for the stock market. Hartnett warns, Close attention must be paid to whether the bullish combination of 'rising yields, rising bank stocks' flips to 'higher yields, lower bank stocks' — a reversal that would become a trigger for deleveraging risk assets. In this scenario, he considers going long the dollar as the best hedge against the Fed's hawkish stance.
He also points out that stock investors currently do not view interest rate levels as a threat to the "Anything But Bonds" bull market, but if the market-friendly Trump administration tolerates rate hikes to put the brakes on the stock market and anti-billionaire sentiment, it would have a significant negative impact on the market.
Credit Risk at Hyperscalers Hits Record High; AI Capital Expenditure Logic Questioned
The most direct manifestation of bond market pressure is the sharp deterioration in the credit risk indicators of hyperscalers. According to the report, the credit spreads of the hyperscaler group have widened significantly, CDS has risen to an all-time high, and the concessions offered in bond issuances are also increasing.
The root cause of this phenomenon is the market's questioning of the return on investment (ROI) for AI capital expenditure. Google and Tesla are viewed as benchmark companies for "capital expenditure ROI." Despite Google and Intel's solid earnings reports last week, chip stocks were still sold off. The core question the market is asking is:
If bondholders are no longer willing to foot the bill for the AI feast, frontier models and memory chip demand, which are highly dependent on continuous capital investment, face the risk of a funding shortfall.
Hartnett previously echoed the judgment of Brian Garrett, a top derivatives trader at Goldman Sachs, who warned that the real risk for AI stocks lies not within the stock market itself, but in the bond market. Garrett has warned for two consecutive weeks that the pain in the credit market would intensify, noting that the S&P 500 is increasingly failing to represent the performance of the average stock, and internal market divergence (low correlation, high dispersion) is intensifying.
Furthermore, Hartnett views "blue-collar semiconductors" — Texas Instruments, Analog Devices, NXP, Microchip Technology, ON Semiconductor, STMicroelectronics, Infineon, and Monolithic Power Systems — as leading indicators of the industrial cycle. This group has fallen a cumulative 21% from its June peak.
Meanwhile, the 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." The Bank of America July fund manager survey showed investor overweight positions in industrial stocks are at their highest since July 2021.
In response to these signals, Hartnett's short-term trading recommendations are: Go long defensive stocks, high-dividend stocks, and long-duration bonds; go short bank stocks (which have seen significant inflows recently), brokerage stocks, tech stocks, and industrial stocks, to hedge against a reversal of the 'prosperity' expectations.
Dual Pressure on Bond and Stock Supply; Gold and Bitcoin Quietly Forming a Bottom
From a broader macro perspective, Hartnett characterizes the 2020s as: An era of rising political populism, globalization yielding to national security, fiscal excess shifting to AI capital expenditure excess, Fed independence yielding to political compromise, and American exceptionalism evolving towards global rebalancing.
In this context, "supply" rather than "demand" has become the primary driver of macroeconomics and markets. This is reflected in three specific areas:
Immigration controls compress labor supply (US initial jobless claims fell to their lowest since 1969); protectionism and tariffs restrict import supply (the US plans to impose new tariffs on 60 trading partners); geopolitical tensions disrupt oil supply (among approximately 80 million barrels per day of seaborne oil globally, about 64 million barrels transit vulnerable chokepoints like the Strait of Hormuz and the Bab el-Mandeb).
In contrast, the constraints on bond supply and stock supply are loosening. The US government still maintains an annual fiscal deficit of $2 trillion, with annual interest payments reaching $1 trillion. Even with $250 billion in tariff revenue over the past 12 months, this is insufficient to close the gap. Companies with negative free cash flow are reducing stock buybacks, further compressing the support from stock supply.
Against this backdrop, Hartnett believes gold and Bitcoin are quietly forming a bottom in 2026, while the bank stock index, representing "Main Street," will outperform the brokerage and private equity indices representing "Wall Street" in the latter half of the 2020s.
Additionally, he lists Hong Kong property stocks as among the most attractive long-term buying opportunities — these stocks are currently trading at the same prices as 30 years ago. He states he will buy the dip during any sell-off triggered by Fed tightening or a yen crisis from the Bank of Japan.
