Original Author: Bu Shuqing
Original Source: Wall Street News
Michael Hartnett, Chief Investment Strategist at BofA Securities, proposed a seemingly contradictory yet logically coherent market assessment in the latest Flow Show report: maintain caution in the short term and recommend withdrawing from risk assets; but from a long-term strategic perspective, he maintains an allocation of "long stocks, short bonds," with the core logic being that US policymakers now view the stock market as a systemic asset that is "too big to fail."
In the latest developments, the BofA Bull & Bear Indicator has risen from 9.4 to 9.7, reaching its highest level since the meme stock bubble in early 2021, reflecting extremely optimistic market sentiment.
At the same time, Hartnett warns that the credit market is sending increasingly clear bearish signals, with credit spreads and CDS for AI hyperscale data center operators continuing to widen, and tech stock fund flows seeing net outflows for the first time in six weeks.
For investors, this "tactically bearish, strategically bullish" dual-track assessment means: in the short term, rotate towards defensive assets and duration assets, but there's no need to be overly pessimistic about the market's long-term prospects—unless the key reversal signal of "rising yields, falling bank stocks" appears.
Bull & Bear Indicator Hits Five-Year High, Overheated Sentiment Risk Rises
The BofA Bull & Bear Indicator rose to 9.7, its highest reading in nearly five years, driven mainly by massive inflows into high-yield bonds, narrowing spreads on global high-yield and AT1 risk bonds, and improved breadth of global stock indices.
Hartnett points out that historically, whenever this indicator reaches similar extremes—whether in 2018, 2020, or 2021—market sentiment has often reversed sharply from extreme optimism to extreme pessimism within the following year. He does not assert that history will necessarily repeat, but clearly cautions that this pattern is worth watching.
Looking at this week's fund flows, nearly all asset classes saw net inflows: cash inflows of $53.7 billion, equity inflows of $32.9 billion, bond inflows of $23.1 billion, gold inflows of $0.9 billion, and cryptocurrency inflows of $0.6 billion.
Among these, the annualized inflow into US stocks reached $652 billion, a record high; the annualized inflow into investment-grade bonds was $527 billion, also a record.
Short-Term Tactics: Retreat and Rotate, Not Add
Regarding short-term operations, Hartnett clearly states that he remains in the camp of "summer retreat/rotation, not addition," advising investors to withdraw from risk assets and rotate into defensive assets (like consumer staples), duration assets (like REITs, small-cap stocks, biotech), and the US dollar.
His logic is that these assets have stronger resilience to persistently tightening financial conditions and, compared to cyclical sectors like banks, industrials, and semiconductors, would suffer less impact from the potential failure of the market's mainstream consensus of "no macroeconomic hard landing, no Fed rate hikes, no AI capex cuts, no Democratic midterm election sweep."
On macro data, Hartnett previously predicted that if July nonfarm payrolls exceeded 125,000 and the unemployment rate fell below 4.1%, Fed chair candidate Kevin Warsh might return to a hawkish stance at the Jackson Hole meeting on August 28; while if nonfarm data was below 50,000 and the unemployment rate exceeded 4.3%, it would benefit duration assets and defensive allocations.
The finally released data presented mixed signals—nonfarm payrolls fell far short of expectations, but the unemployment rate dropped to 4.1%, partially offsetting the negative shock, although the labor force shrank by 264,000 during the same period.
Long-Term Strategy: Policy Backstop Makes Stocks "Too Big to Fail"
From a strategic perspective, Hartnett maintains the core allocation of "long stocks, short bonds," citing the rationale that policymakers have clearly indicated they will not allow a major stock market decline. He points out that the current US economy heavily relies on the wealth effect—US household stock holdings have increased by $7 trillion year-to-date, after rising by $9 trillion in both 2024 and 2025—and the AI data center capital expenditure boom.
Last week's coordinated FX market intervention—aimed at ending what Hartnett called the "poor man's LTCM" deleveraging event—further corroborates this judgment: the US government will always intervene to prevent tightening financial conditions from ending prosperity and bubbles. He adds that the Trump administration and Treasury Secretary Scott Bessent still hold the card of yield curve control.
On the earnings front, Hartnett acknowledges that EPS is the core engine of the current bull market, with 12-month forward EPS expectations revised up by 33%, partly thanks to about $35 billion in tariff refunds over the past three months, somewhat offsetting the roughly $75 billion tariff impact between May and July 2025.
Termination Signals and Tail Risks
Despite the long-term bullishness, Hartnett clearly outlines the conditions for ending the current bull market: once a bond self-defense selling event characterized by "rising yields, falling dollar" occurs, forcing a sharp turn in fiscal policy and driving an asset allocation shift from stocks to bonds, this round of prosperity will come to an end.
Regarding the "canary in the coal mine" reversal signal investors care most about, Hartnett gives a clear answer: "rising yields, falling bank stocks."
In the credit market, he notes that credit spreads and CDS for AI hyperscale data center operators are still widening, due to fading large-scale share buybacks and cash flows. He believes that only if the MAGS (tech giants) quarterly earnings per share exceed $70 can the threat of "cheap Chinese computing power ending the AI capex boom" be dispelled.
Gold as a Hedge for Political Cycles and Midterm Elections
Hartnett concludes the report by widening the lens to a more macro political-economic framework.
He notes that the political populism of the 2020s has driven fiscal expansion, boosting US nominal GDP from $20 trillion to $32 trillion over the past six years, a 63% increase, while US national debt is about to surpass $40 trillion.
On the political landscape, he characterizes the upcoming midterm elections as a battle of policy paths between "populist capitalism" (reducing deficits through growth) and another political route (reducing deficits through wealth taxes).
In market terms, Republicans retaining a Senate majority would be favorable; going long consumer stocks is the best strategy to bet on Trump shifting focus to affordability for the people; while going long gold is an effective tool to hedge the tail risk of a "K-shaped" voter structure triggering a simultaneous sharp decline in yields, the dollar, and stocks before year-end.
