Bank of America strategist Michael Hartnett has warned investors that financial markets are entering bubble territory, even as the US Federal Reserve cuts rates with gold, cryptocurrencies and stocks at record highs.
In his latest Flow Show note, Hartnett highlighted that major assets have surged in 2025: gold is up 35%, bitcoin 17%, and global stocks 14%. By contrast, the US dollar has fallen nearly 10% and oil is down 11%. He attributed the rally to US economic policies including tariff reductions, tax cuts and rate cuts, which have encouraged risk-taking.
Hartnett suggested that the best equity trades in the current environment are “bond sensitives” such as small-cap stocks, real estate investment trusts, and biotech. However, he also noted that many investors are being forced into high-risk assets, with hedge funds chasing “junk” and high-beta momentum stocks to keep pace with the market.
The strategist pointed to historical patterns of asset bubbles, noting that since 1900, major equity bubbles have seen average gains of 244% before collapsing. Today, he said, the “Magnificent 7” tech stocks are the closest proxy for a bubble, having risen more than 220% since March 2023.
Hartnett outlined four key strategies for trading bubbles:
- Go long on bubble assets, while recognising they are concentrated and short-lived.
- Balance with distressed value markets, such as Brazil, the UK and energy stocks.
- Short corporate bonds tied to bubble companies, which often weaken before equities.
- Short government bonds and go long bond volatility, as bubbles typically end with higher yields.
Despite the optimism in markets, Hartnett cautioned that rising asset prices could spill over into consumer inflation, posing political risks ahead of the 2026 US midterm elections. He also warned that utilities could face pressure as energy bills rise, making the sector particularly vulnerable.
