Breakthrough or Collapse? Bank of America Hartnett: U.S. stocks and other risk assets are at a critical moment, focusing on "three leading indicators"

As the S&P 500 index approaches the 6,000-point mark again, while the 10-year Treasury yield stubbornly remains high, Bank of America Chief Investment Officer Michael Hartnett has issued a warning: the answer to whether U.S. stocks and other risk assets will break through or crash lies in three key indicators.

In the latest Flow Show report, Hartnett clearly pointed out that brokerage stocks, bank stocks, and Bitcoin—these three "B" class assets will become the best "traffic lights" for judging market direction. If these three leading risk assets form a double top pattern, it will release an "extremely bearish" signal; conversely, if they can break upward cleanly, it means "extremely bullish."

This judgment is not unfounded. A week ago, Bank of America strategists recommended going long on long-term bonds, especially 30-year Treasuries—stating that it was time to buy "humiliated" assets, and indeed, 30-year Treasuries have risen. However, almost all assets are rising, with the S&P 500 index recording its best monthly performance of the century in May, surging 6%, marking the best May performance since 1990.

In stark contrast to the frenzy of risk assets, the dollar "just can't seem to rise," and the market has begun to "whisper that the dollar is entering a bear market."

Hartnett warns that a weak dollar will become a future tool for "making American manufacturing great again"—currently, manufacturing accounts for only 8% of U.S. jobs. This trend, combined with doubts about the Federal Reserve's independence, will lead to a dollar bear market, subsequently driving gold, emerging markets, and international assets to rally.

In the face of the impending major changes, both bulls and bears have begun to position themselves. Hartnett stated that bears are preparing for a crash by allocating to defensive sectors such as healthcare, consumer staples, and utilities—these sectors currently account for only 18% of the S&P 500 index, the lowest level since 2000.

Bulls, on the other hand, are employing a barbell strategy of "going long on the seven tech giants and going long on value stocks in other regions" to hedge against the potential bubble top in the U.S. market and the risks of excessive fiscal spending in the EU.

The latest capital flow data further confirms the market's divergent sentiment. Cryptocurrencies recorded an inflow of $2.6 billion this week, marking the largest single-week inflow since January. Other noteworthy capital flows include:

• Gold: Weekly inflow of $1.8 billion, with an annualized inflow reaching a record $75 billion

• Emerging market bonds: Recorded the largest inflow since January 2023 ($2.8 billion)

• Global equities: Largest outflow in 2025 ($9.5 billion)

• Japanese equities: Largest outflow ever ($11.8 billion)

Although Hartnett still recommends allocating to the BIG portfolio (bonds, international stocks, gold) in 2025, he also acknowledges significant risks: U.S. policymakers may shift to a "we need a bigger bubble" policy, stabilizing the debt/GDP ratio through tariff reductions, tax cuts, and interest rate cuts.

The seven tech giants have once again performed well, with the trading price-to-earnings ratio returning to 42 times. Historical data shows that stock market bubbles since 1900 typically peak at a price-to-earnings ratio of 58 times and a 244% increase, indicating that the seven tech giants still have 30% upside potential.

What is even more concerning is that in the past 14 asset bubbles, 12 were accompanied by rising bond yields. Currently, the U.S. 30-year real interest rate is close to 3%, the highest level since November 2008—"nothing indicates the existence of a bubble more than stocks driving nominal/real yields higher."

A critical moment in the market is approaching, and investors need to closely monitor the performance of the three "B" indicators, which will ultimately reveal the direction of this financial game