Six months before the peak of the "Technology and Internet Bubble" in March 2000, only the technology and communications sectors were rising, which was "exactly the same" as it is now.
Author: Bu Shuqing, Wall Street News
Michael Hartnett, chief investment strategist at Bank of America Securities, warned that the current market structure is highly consistent with the dot-com bubble bursting in 2000, and he suggested that investors start buying bonds on dips.
In the latest "Flow Show" report, Hartnett pointed out that in the six months before the peak of the dot-com bubble in March 2000, the technology sector rose by more than 40%, while the consumer staples sector fell by 30%, and all sectors except technology and telecommunications fell.
He said that this pattern is "exactly the same" as the current market trend. At the same time, 400 constituent stocks in the S&P 500 Index fell below the 50-day moving average, and 300 stocks fell below the 200-day moving average. The market gains were highly concentrated in the artificial intelligence-related sectors represented by "Mag7".
In the bond market, the 10-year U.S. Treasury yield has risen to 5.33%, a new high since 2002. Hartnett saw this as a buying opportunity and shouted "buy humiliation", advising clients to start increasing their bond positions.
He believes that long-term U.S. bond returns have fallen to the lowest level in a century, and similar extreme low returns in history often mark the arrival of generational buying opportunities.
Market gains are extremely polarized, and analog signals continue to light up in 1999
Hartnett used the title "A Tale of Two Cities" in the report to describe the polarization pattern of the current market. He wrote that the market is "long artificial intelligence" (NDX) and "short artificial intelligence unrelated assets" (S&P 500 Equal Weight Index SPW), while the Mag7, AI and biotech sectors have shown obvious immunity to the high interest rate environment, and "the 1999 analogy still holds."
At the data level, statistics from the Goldman Sachs Technology Trading Desk show that even though the index is at a historical high, the median S&P 500 component stock has fallen 16% from its high point, and the market breadth has fallen to the low level during the technology bubble period. The next day, the proportion of stocks whose stock prices were above the 200-day moving average further fell below 50%.
The historical template cited by Hartnett shows that in the six months before the peak in March 2000, the technology sector alone rose by more than 40%, while the rest of the sectors fell across the board, with the consumer staples sector falling as much as 30%. He believes that the degree of sector differentiation in the current market is almost the same as that then.
AI CapEx Bubble: A Historical Mirror from the Railroad Bubble
Hartnett characterized artificial intelligence as "the biggest bubble since railroads," and in this week's report conducted a detailed review of the bursting of two railroad bubbles in the 19th century.
The first railroad bubble ended in 1873: between 1861 and 1872, railroad stock prices tripled, U.S. railroad mileage expanded from 35,000 to 70,000 miles, and peak capital expenditures accounted for approximately 5% of GDP. Subsequently, the Franco-Prussian War triggered a contraction of credit in the United States and the return of European capital. Jay Cooke & Company collapsed in 1873. About 115 railroad companies went bankrupt in the next 12 months.
The second railroad bubble ended in 1881: railroad stocks rose 2.5 times from 1877 to 1881, once accounting for 63% of the total market value of the U.S. stock market. Railroad construction quadrupled in four years, resulting in overcapacity, freight rates falling, revenue and profits collapsing, and ultimately triggering a banking crisis and the third longest economic recession in U.S. history (1882-1885).
Comparing the current situation, Hartnett pointed out that capital expenditures for hyperscale cloud computing companies (Hyperscalers) are expected to reach 3.5% to 4% of GDP in 2027, which is still lower than the peak level of 5% in the railway era, and semiconductor prices continue to rise, which is completely different from the 5% annual decline in freight rates in the railway era.
However, he also warned that both railroad bubbles were supported by falling Treasury yields, "and this is obviously not the current situation."
In addition, the end of both railway bubbles was accompanied by credit events, liquidity collapse and geopolitically driven capital outflows - all three signals are currently reflected in Oracle credit default swaps (CDS), the Australian dollar against the Japanese yen exchange rate and the French bond market.
'Buy Shame': Hartnett is bullish on U.S. Treasuries that have been ignored by the market
In the bond market, Hartnett's stance has become increasingly clear.
He acknowledges that a 100- to 200-basis-point decline in yields may require a credit event or recession as a catalyst, but he believes that the current extreme positioning itself constitutes a reason to buy: asset allocators are generally heavy on stocks and short on bonds to bet on the final rise in U.S. technology stocks and the final rise in U.S. bond yields.
In terms of long-term U.S. bonds, long-term zero-coupon bonds (ZROZ) have fallen 65% from their peak in March 2020, and the 10-year rolling U.S. bond return rate is -2%, the lowest in a century. Hartnett cited historical data and pointed out that the last time long-term returns for stocks and commodities were similarly dismal, it marked the emergence of a generational buying opportunity.
He further set his sights on the investment-grade bonds of ultra-large-scale cloud computing companies, pointing out that the price of the U.S. Investment-Grade Technology Bond Index (CITE) has fallen by 9% in the past year, and the yield has increased from 4.5% to 6.2%. He believes that given that the AI industry has been endorsed by the U.S. government, the long-term bond yields of ultra-large companies such as Oracle (yield 8.4%), Meta (7.5%), and Google (6.9%) are close to junk bond levels, and may soon attract buyers.
Investors began to follow up and increase their bond holdings
The latest EPFR data (as of Wednesday) showed that bonds had a net inflow of US$18.8 billion, stocks had a net inflow of US$15.8 billion, cryptocurrencies had a net inflow of US$900 million, gold had a net inflow of US$700 million, and cash outflows were US$118 billion due to end-of-quarter position adjustments.
Specifically, long-term bonds (government bonds and corporate bonds) with a maturity of more than 6 years saw a net inflow of US$7.4 billion in a single week, the largest since May 2025; municipal bonds saw a net inflow of US$4.2 billion, a record high since data was available in 2004; European stocks saw a net inflow US$1.3 billion, the largest since February 2026; Chinese stocks had a net inflow of US$3.7 billion, the largest in the past nine weeks; the technology sector had a net inflow of US$3.3 billion, the largest in the past five weeks; utilities had a net inflow of US$1 billion, the largest since December 2025.
It is worth noting that the proportion of stock positions currently held by Bank of America's private clients to assets under management has risen to a record high of 66.3%, while the proportion of cash has dropped to a record low of 9.4%, indicating that institutional investors' stock positions are extremely crowded.
Four key warning lines
In the report, Hartnett listed four market risk trigger levels that need to be closely tracked: the global financial stock ETF (IXG) fell below $125, the bond market volatility index MOVE rose above 125, the mid-cap stock ETF (MDY) fell below $666, and the small-cap stock ETF (IJR) fell below $135.
He pointed out that once small-cap stocks follow the decline of bank stocks, the risk cascade effect of deleveraging will officially start, and policy support will be difficult to stop by then.
The Bank of America Bull and Bear Index fell back from 9.3 to 8.8 this week, which Hartnett attributed to wider risk bond spreads, high-yield bond outflows and a rapid deterioration in global market breadth - a net 27% of the global equity index components fell below both the 50-day and 200-day moving averages, the worst levels since March. Although the indicator has retreated, the reading of 8.8 is still in "sell" territory.