BofA says best trade in AI bubble is long tech leaders and beaten-down assets, short AI bonds

Bank of America Securities chief strategist Michael Hartnett said the preferred approach in the current AI bubble is to stay long dominant AI-related technology stocks while also buying assets that have been neglected for a long time, and to short AI-linked bonds. In his latest note dated Aug. 15, Hartnett argued that this mix could capture two-way returns during what he described as the final melt-up phase of a nominal GDP bubble. BofA’s bull-and-bear indicator slipped from 9.7 to 9.3, but it remains in an extremely bullish zone and still carries a sell signal. Even so, global equities have continued to rise since that signal was issued in May. The report also said flows are moving structurally into gold and commodities, while tech stocks just saw their biggest weekly outflow in seven weeks. Private client equity allocation climbed to a record 66.4%, while cash fell to the lowest level on record and bond exposure dropped to its lowest since 2022. Hartnett also pointed to more than $1 trillion in AI capital spending combined with negative cash flow as a source of heavy issuance pressure for related bonds, and said U.S. midterm elections in November are a key political variable for what comes next.