Bank of America Hartnett warns: Under loose policies, regulatory easing, and the influx of retail investors, global stock markets are forming a "larger bubble."

The ongoing revelry on Wall Street is raising increasing concerns about a bubble.

Bank of America strategist Michael Hartnett recently warned that under the combined effects of a policy shift by the Trump administration, global central bank easing, and financial deregulation, the market is being pushed towards a “larger bubble” characterized by “greater retail participation, more abundant liquidity, and more extreme volatility.”

The latest dynamics highlight the strong driving force of policy on the market. As noted in a previous article, Trump recently visited the Federal Reserve, becoming the fourth sitting president to visit the institution since President Roosevelt in 1937. Hartnett pointed out that this move reflects the Trump administration's inclination to push the economy and market towards an “ultimate blowout” in response to the nearly $37 trillion national debt after failing to cut spending.

Hartnett's analysis suggests that given the U.S. government's annual interest expenditure exceeding $1 trillion, the Trump administration urgently needs the Federal Reserve to cut interest rates to stabilize debt costs. He therefore predicts that the next Federal Reserve chair may initiate yield curve control to more directly lower borrowing costs, indicating that expectations for policy easing are still rising.

Buoyed by these expectations, Wall Street continues to bet on lower tariffs, taxes, and interest rates, driving the S&P 500 index up 9% this year. However, market performance has not been uniformly strong; a weaker dollar benefits international assets, and there has been a clear divergence between “billionaire concept stocks” closely related to Trump and small-cap stocks sensitive to interest rates.

Trump’s Policy Shift and Debt Pressure

According to Hartnett's analysis, the focus of the Trump administration's policy has shifted from fiscal “detox” to “gorge.” With no ability or willingness to cut government spending of up to $7.1 trillion, controlling debt costs has become the top priority.

Hartnett's calculations show that only when the federal funds rate is below 3% can the U.S. stabilize its annual interest payments of about $1 trillion. This explains why the White House has exerted tremendous pressure on the Federal Reserve to cut rates, even hinting at the possible use of yield curve control (YCC), an unconventional tool, to artificially lower rates to support the massive government debt.

Market Divergence: Global Bank Stocks Lead, Small Caps Under Pressure

Driven by policy expectations, global bank stocks have become a major highlight of the market in 2025, seen as the best embodiment of global fiscal expansion.

Hartnett noted that since the beginning of the year, European bank stocks have surged 62%, while bank stocks in the UK and Japan have risen 37% and 24%, respectively, both exceeding the 17% increase in U.S. bank stocks. However, Hartnett warned that “bond vigilantes” could strike back at any time; if the yield on UK 30-year government bonds breaks above 5.6% or the U.S. exceeds 5.1%, it could put pressure on bank stocks

The other side of the market is the temperature difference between Wall Street and "Main Street." Despite the strong performance of the S&P 500 index, Trump's poll support has fallen back to near the lows of April.

Since the election, the so-called "brother billionaires" in tech stocks have risen by 71%, while small-cap stocks, which are sensitive to interest rates and represent their voter base, have fallen by 1% this year.

Key indicators flash yellow lights, but "sell" signals are not full

Hartnett stated that despite the high market sentiment, several proprietary indicators from Bank of America are approaching warning levels. Its "Bull-Bear Indicator" has risen from 6.3 to 6.4, the highest point since the November 2024 U.S. election, but still below the "sell" signal threshold of 8.0. The rise in this indicator is mainly driven by strong inflows into emerging market stocks and bonds, as well as a decline in cash levels among fund managers.

Currently, only one of Bank of America's multiple sell rules has been triggered: the cash level in the Fund Manager Survey (FMS) is below 4%.

Other key indicators have not yet met the standards: The global market breadth rule is currently at 81%, below the sell signal level of 88%; the global fund flow trading rule shows that funds flowing into global stocks and high-yield bonds over the past four weeks account for 0.8% of managed assets, also below the sell signal level of 1.0%. Hartnett also pointed out that hedge funds are still covering their short positions in the S&P 500 index.

Easing wave and regulatory relaxation: a policy combination that breeds "greater bubbles"

Hartnett believes that the current asset bubble is jointly fostered by global easing policies and the relaxation of financial regulations. In terms of monetary policy, over the past 12 months, both the Federal Reserve and the Bank of England have cut interest rates by 100 basis points, the European Central Bank has cut rates by 200 basis points, while the Bank of Japan is the only exception, having raised rates by 40 basis points.

Global policy rates have fallen from 4.8% to 4.4%, and are expected to further decline to 3.9% within the next year

More importantly, financial regulatory policies are also being relaxed simultaneously, which is typically a characteristic of the late stage of a bull market. Hartnett specifically pointed out that the Trump administration is planning to allow retail investors to include private equity in their 401(k) pension plans through executive orders. In addition, the Financial Industry Regulatory Authority (FINRA) is "weakening" the Pattern Day Trading Rule, planning to significantly reduce the minimum margin requirement for retail day traders from $25,000 to $2,000.

These measures, combined with the fact that the trading volume of "zero-day options," a popular tool for retail day traders, has accounted for more than 60% of the total trading volume of S&P 500 options in the third quarter, collectively form Hartnett's core argument: an unprecedented market bubble driven by a larger scale of retail investors, more abundant liquidity, and more extreme volatility is forming.

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