Will the US Government 'Not Allow' a Market Crash? BofA's Hartnett Says 'Short Bear, Long Bull' and Identifies Two Signals for Bull Market End

BofA strategist Michael Hartnett has issued a 'short bear, long bull' outlook for US equities, arguing that market sentiment has become excessively euphoric and credit markets are flashing warning signs, making it prudent to reduce risk exposure in the short term. However, he emphasizes that as long as US policymakers continue to treat the stock market as a 'too big to fail' systemic asset, the long-term strategy of being long equities and short bonds will remain unchanged. He identifies 'rising yields and falling bank stocks' as the key signals indicating the true reversal of the current bull market.

In his latest 'Flow Show' report, Hartnett notes that the resilience of this bull market stems from the US economy's heavy reliance on the wealth effect generated by the stock market.

US households have seen their stock assets increase by $7 trillion this year, continuing the trend of $9 trillion gains in both 2024 and 2025. Combined with the capital expenditure boom in AI data centers, this creates a structural reason why authorities are unwilling—and dare not—allow a sharp stock market decline.

He also points out that last week's coordinated intervention in the foreign exchange market, which calmed a deleveraging sell-off he dubbed a 'poor man's LTCM,' serves as fresh evidence that the US government stands ready to defend the market. Moreover, the Trump administration and Treasury Secretary Scott Bessent still hold yield curve control as a policy tool in reserve.

Nonetheless, Hartnett has not turned fully optimistic. He observes that driven by massive inflows into high-yield bonds, narrowing spreads in global high-yield and AT1 risk bonds, and improved breadth in global equity indices, BofA's Bull & Bear indicator has risen from 9.4 to 9.7, hitting its highest level since the meme stock frenzy of 2021.

Hartnett notes that historically, whenever the BofA Bull & Bear indicator reached similar extremes—such as in 2018, 2020, or 2021—market sentiment rapidly shifted from extreme optimism to extreme pessimism within a year. While he does not claim history will necessarily repeat, he clearly warns that this pattern warrants caution.

Based on this assessment, Hartnett continues to advocate a tactical 'summer retreat and asset rotation,' recommending a shift of capital into defensive sectors such as consumer staples, as well as duration-sensitive assets like REITs, small-cap stocks, and biotech stocks, while increasing dollar exposure.

He explains that such assets are better equipped to withstand tightening financial conditions and would suffer less damage than cyclical sectors like banks, industrials, and semiconductors if the market's widely held optimistic narrative—'no recession, no Fed rate hikes, no slowdown in AI capex, and no excessive midterm election volatility'—were to fail.

On the macroeconomic front, Hartnett had previously predicted that if July's nonfarm payrolls exceeded 125,000 and the unemployment rate fell below 4.1%, Fed Chair Kevin Warsh might revert to a hawkish stance at the Jackson Hole global central bank symposium on August 28. Conversely, if nonfarm payrolls came in below 50,000 and unemployment rose above 4.3%, it would favor bond assets and defensive positioning.

The final released data presented mixed signals. Nonfarm payrolls fell far short of expectations, but the unemployment rate dropped to 4.1%, partially offsetting the negative impact, even as the labor force shrank by 264,000 during the same period.

As for the key signals marking the true end of this bull market, Hartnett offers a clear answer: 'rising yields, falling bank stocks.'

He warns that if the bond market experiences a self-defensive sell-off characterized by 'rising yields and weakening dollar,' forcing an emergency shift in fiscal policy and driving capital from stocks into bonds, the era of prosperity could come to an end.

Hartnett also highlights concerns in the credit market. Credit spreads and CDS for AI hyperscale data center operators continue to widen, primarily due to weakening corporate buyback momentum. Only if the combined quarterly EPS of the 'Magnificent Seven' tech giants exceeds $70 can the market dispel doubts that 'cheap Chinese computing power will end the AI capex boom.'

In closing, Hartnett elevates his perspective to a political-economic framework.

He points out that the populist wave of the 2020s has driven fiscal expansion, causing US nominal GDP to grow 63% over six years to $32 trillion. US national debt is also projected to surpass $40 trillion.

Hartnett frames the upcoming midterm elections as a contest between two paths: 'growth to reduce deficits' versus 'wealth tax to reduce deficits.'

He believes that if Republicans retain the Senate majority, it will be bullish. Buying consumer stocks would be a bet on the Trump administration shifting focus toward affordability, while buying gold would serve as a hedge against 'K-shaped' voter polarization and an effective tool to avoid a simultaneous sharp drop in yields, the dollar, and equities before year-end.