Un-common sense

Michael Hartnett, BofA | This Is The Biggest Bubble Since The Railroads The current AI-driven market rally resembles one of the biggest speculative bubbles in history, comparable to the Nifty Fifty or dot-com era, but investors are unlikely to aggressively sell before two catalysts occur: a major OpenAI/SpaceX-style IPO cycle and a clear Fed policy tightening shock tied to rising CPI from tariffs and inflation. - AI mega-caps now dominate market concentration, with the “AI bubble” larger than past railroad, Japan, and dot-com bubbles by some metrics. - Bond yields are the main warning signal: the rise in long-term yields and global cost of capital seen as dangerous for risk assets, especially leveraged consumers, private equity, housing, and emerging markets. - Several macro stress signals are flashing: weak Asian currencies (KRW, JPY, INR, IDR), widening high-yield spreads, EM outflows, and BofA’s Bull & Bear Indicator hitting a contrarian “sell” level. - Historically, speculative IPO waves (Alibaba, NTT, Visa, etc.) often marked medium-term market tops rather than immediate crashes. - Current gains are very narrow (“wealth effect, not wage effect”), while equal-weight consumer stocks remain weak versus the S&P 500. - Despite near-term bubble concerns, structurally bullish on emerging markets and commodities. - Preferred post-bubble opportunities would be consumer stocks and smaller AI adopters/disruptors rather than dominant mega-cap AI platforms. - Geopolitics, energy, AI competition with China, and inflation are increasingly interconnected themes shaping markets. Zeitgeist quote: "Everyone is now convinced that equities are the best inflation hedge." Feedback from recent London trip, main soundbites: - "we’re long and paranoid,” - “wants/needs to de-escalate Iran, and stocks pop, yields drop on deal,” - “if UK gilts find love, everything finds love,” - “European electorate shifting decisively right, Farage in UK, Le Pen in France, and you watch the AfD in Germany will win Saxony-Anhalt in September, their first state election,” - “the fear in bonds is nowhere near as strong as greed in equities,” - “Warsh will be rhetorically hawkish but practically dovish over the summer,” - “US actions in Venezuela, Ukraine, Iran, Greenland, Cuba should be viewed through single strategic lens competition with China in AI, which can only be won by securing access to critical resources.” ( h/t Octavian Adrian Tanase)