Bank of America strategist Michael Hartnett issued a stark warning this week, triggering a contrarian sell signal as the U.S. stock market’s artificial intelligence obsession reaches levels that could surpass the dot-com bubble. According to a May 22 report, the bank’s Bull & Bear Indicator rose to 8.0—a level that has historically preceded weaker returns for risk assets. Hartnett noted that since 2002, all 17 previous such signals were followed by global stock declines averaging 2–3% over two to three months, with maximum drawdowns reaching 15–20% in some cases.
The warning comes amid record-breaking concentration in AI-related equities. Hartnett cautioned that if anticipated mega-IPOs from companies like SpaceX, OpenAI, and Anthropic materialize, the AI sector could swell to 47–48% of total U.S. market capitalization. That would exceed the peaks seen during the dot-com era, Japan’s 1980s bubble, and the Nifty Fifty craze, trailing only the railroad mania of the 1880s.
Despite the sell signal, fund flows continue to pour into technology. A separate note from Goldman Sachs revealed that hedge funds bought technology stocks last week at the fastest pace in nearly three months, driven by renewed demand for AI-exposed companies. North America and Asian emerging markets led the buying, with a focus on semiconductor manufacturers and software firms. Hedge fund positions in global information technology stocks are now at their highest levels since 2016, when Goldman Sachs Prime Brokerage began tracking them.
Hartnett identified rising bond yields as the primary threat to the rally, warning that “bond vigilantes” are pushing back. He also pointed to inflation concerns, with Korean semiconductor export prices up 148% year-over-year and DRAM prices surging 223%, suggesting Asia is exporting inflation worldwide. Meanwhile, oil has surged over 70% year-to-date, acting as the top-performing major asset. In contrast, Bitcoin has declined more than 11% this year, reflecting a split across asset classes. BofA’s private clients now hold a record 65.7% in equities, with cash at near-record lows, underscoring extreme bullish positioning.
The report advises investors to remain “long and paranoid,” balancing strong momentum against the risks of inflation, interest rates, and crowded trades. While Hartnett did not predict an imminent crash, he flagged vulnerabilities in emerging markets, housing, and private equity as cracks worth monitoring.
