Bank of America Securities Chief Investment Strategist Michael Hartnett has warned that the narrowing leadership in U.S. equities resembles the market conditions that preceded the March 2000 dot-com peak, while arguing that the steep selloff in bonds has created a more attractive entry point for government debt.
Hartnett’s latest note centers on a growing mismatch between headline equity indexes and the performance of most stocks beneath them. The S&P 500 remains close to record territory, but Bank of America’s desk data showed that the median constituent was 16% below its own peak. At the same time, 400 S&P 500 companies had fallen below their 50-day moving averages and 300 were below their 200-day averages, measures often used to judge whether a market advance is broadly supported.
The comparison with 2000 rests on market concentration. During the six months before the dot-com-era peak, technology shares rose more than 40% while consumer staples fell 30%, according to Hartnett. Outside technology and telecoms, much of the market declined. He sees an echo in the current concentration of gains among artificial-intelligence-linked companies, including the so-called Magnificent Seven large-cap technology names.
That pattern places greater pressure on a small group of companies to sustain index-level gains. A reversal among those leaders would have a larger effect on benchmark indexes than in a market where gains are shared more evenly across sectors.
Bond selloff brings Treasury yields back into focus
Hartnett’s call to add bonds follows a punishing multi-year period for fixed-income holders. The 10-year U.S. Treasury yield reached 5.33%, its highest level since 2002, according to the Bank of America note. Because bond prices move inversely to yields, the rise has inflicted deep losses on long-dated securities.
The iShares 25+ Year Treasury STRIPS Bond ETF, known by its ticker ZROZ, was down 65% from its March 2020 peak, Hartnett wrote. He also cited a 10-year rolling Treasury return of minus 2%, which the report described as the weakest reading in a century.
Higher yields mean newly purchased Treasury bonds offer more income than they did during the low-rate period that followed the global financial crisis and the pandemic. Hartnett’s recommendation reflects that reset in valuations: government debt is again competing with equities for capital on yield, even as rate volatility remains elevated.
EPFR data cited by Bank of America showed bond funds received $18.8 billion in the week through Wednesday. Funds focused on bonds with maturities longer than six years attracted $7.4 billion, their largest inflow since May 2025. Municipal bond funds drew $4.2 billion, the largest inflow in EPFR’s records dating to 2004.
Equity funds also attracted $15.8 billion during the week, while crypto funds received $900 million and gold funds took in $700 million. Cash funds recorded $118 billion of outflows, which the report linked to quarter-end positioning.
AI spending faces a more difficult financing backdrop
Hartnett compared the AI capital-expenditure cycle with U.S. railroad booms of the 19th century, when rapid infrastructure building lifted asset prices before excess capacity and tighter credit led to sharp reversals.
He cited forecasts for hyperscaler capital expenditure to reach 3.5% to 4% of U.S. gross domestic product in 2027. That would remain below the roughly 5% GDP peak associated with the railroad era, but the comparison points to the scale of spending planned by major cloud-computing companies.
In the first railroad cycle referenced by Hartnett, rail shares tripled between 1861 and 1872 as U.S. rail mileage expanded from 35,000 miles to 70,000 miles. The boom ended in a credit shock that included the 1873 failure of Jay Cooke & Company. About 115 railroad companies went bankrupt over the following year, according to the note.
A later cycle saw rail shares rise 2.5 times from 1877 to 1881, eventually representing 63% of total U.S. equity market capitalization. Rail construction quadrupled within four years before overcapacity, lower freight rates, banking stress and a recession from 1882 to 1885.
Hartnett drew a distinction between those earlier episodes and today’s market: railroad expansions were supported by falling government-bond yields, whereas AI-related capital spending is occurring with Treasury yields near multi-decade highs. Higher borrowing costs can make aggressive investment plans harder to finance and leave richly valued shares more exposed if projected revenue growth disappoints.
Crowded equity exposure raises sensitivity to market stress
Bank of America’s private-client data showed equity allocations at a record 66.3% of assets under management, while cash allocations fell to a record low of 9.4%. Hartnett characterized that mix as crowded equity positioning.
His note also tracked several market levels as potential warning signals: the iShares Global Financials ETF, or IXG, below $125; the ICE BofA MOVE Index above 125; the S&P MidCap 400 ETF, or MDY, below $666; and the iShares Core S&P Small-Cap ETF, or IJR, below $135. The MOVE Index measures expected volatility in the U.S. Treasury market.
A simultaneous decline in small-cap and bank shares could signal broader deleveraging pressure, Hartnett said. Banks and smaller companies tend to be especially sensitive to tightening financial conditions because they rely more heavily on credit availability and refinancing markets than the largest technology companies.
The bank’s bull-and-bear indicator fell to 8.8 from 9.3 during the week. Global breadth was also weak: Bank of America calculated that a net 27% of global equity-index constituents were below both their 50-day and 200-day moving averages, the weakest result since March.
For crypto markets, the immediate evidence in Hartnett’s data is mixed rather than conclusive. EPFR recorded positive crypto-fund inflows during the week, but the much larger flows into bonds and the fragile breadth across equities show that market participants are reassessing where risk is being rewarded. A sustained equity pullback led by heavily owned technology shares would test whether digital assets can maintain demand while broader risk appetite contracts.
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