When will the AI bubble burst? Bank of America Hartnett suggests closely monitoring this key indicator

Driven by the AI boom, the U.S. stock market is experiencing a strong rebound dominated by a few tech giants, but concerns about its potential bubble are also increasing.

Michael Hartnett, Chief Investment Strategist at Bank of America, pointed out in his latest "Flow Show" report that the core signal for determining whether the current AI bubble is bursting lies in the changes in credit spreads within the tech industry.

He believes that the key risk point of the current AI-driven bull market does not come from high stock prices, but from the enormous capital expenditures behind it. As long as the spread between tech debt and government bonds remains narrow or stable, this round of U.S. stock market rally may continue.

However, once the spread begins to widen, it will indicate that the market is starting to worry about the massive investments these companies are making to maintain their AI leadership. Their huge "cash burn" will make the "overbuilding" model difficult to sustain.

According to recent estimates by Morgan Stanley, by 2028, AI-related capital expenditures could reach as high as $2.9 trillion.

Hartnett's warning provides a clear observation indicator for a market immersed in AI frenzy. He also drew comparisons with history. The report noted that a similar situation occurred in the second half of 1999 during the "internet bubble period," when the widening credit spreads of tech companies foreshadowed the subsequent market crash.

Dual Risks: The Most Concentrated Rebound in History and Labor Market Fractures

The fragility of this rebound is starkly exposed by its extreme market concentration. Since the market rebound in April, U.S. stock market returns have been highly concentrated in just a few companies.

Data shows that the "Magnificent Seven" (Mag7) along with Broadcom, Oracle, and Palantir—these 10 companies contributed 80% of the returns of the S&P 500 index during the same period. This unprecedented concentration amplifies the risks in specific sectors.

At the same time, the impact of AI on the real economy has begun to emerge. The report cites data indicating that the unemployment rate for U.S. college graduates has surged from 4.0% in December 2023 to 8.1%, which may signal that AI technology is having a disruptive effect on the labor market.

Zero Risk Expectations? Three Contrarian Indicators Sound the Alarm

Despite the lurking risks, investor sentiment is currently extremely optimistic. Hartnett's survey shows that 60% of clients expect the market to be in a "Goldilocks" state (i.e., falling interest rates and rising stock prices), while the proportion of clients expecting deflation (i.e., both interest rates and stock prices to fall) is zero Hartnett believes that this "zero expectation" itself is a contrarian signal worth being cautious about.

In addition, he listed three potential "sell signals" from the Fund Manager Survey (FMS) that, once triggered, often indicate a short-term market correction:

• The probability of a "hard landing" in the economy expected by investors drops to 5% or below.

• Global equity allocation increases from a net increase of 4% to over 25%.

• Investor cash levels decline further from 3.9%. The report specifically points out that historically, cash levels below 3.7% have occurred 20 times, each time accompanied by a decline in the stock market and U.S. Treasuries outperforming the market in the following 1-3 months.

Bank of America is optimistic about China and gold

While warning about the AI bubble, Hartnett also turned his attention to markets overlooked by Wall Street mainstream. The report clearly states that the Chinese market has become its favored investment target ("favorite play").

The reasons he provided are that the Chinese market currently possesses multiple advantages: "overlooked, tariffs peaking, consumption stimulus, and record trade surplus." These factors together form an attractive investment logic. The report also believes that as geopolitical tensions may ease, oil-importing countries like Japan and India will also benefit.

Furthermore, regarding gold, Hartnett maintains a long-term bullish stance. He believes that in the inflationary decade of the 2020s, factors such as geopolitical isolation, immigration control, and state intervention will support gold prices. More importantly, the ongoing depreciation of the dollar and market expectations that various central banks may be forced to reassess their gold reserves to alleviate debt burdens constitute significant long-term benefits for gold