Bank of America's Hartnett: This round of US stock market rise is supported by fiscal policy and AI. Once financing costs rise, the market may reverse.

Bank of America's Hartnett believes that the continued rise in US stocks is being driven by massive government fiscal spending and AI investments, forming a self-reinforcing "boom loop", but this loop has a clear breaking point - once the bond market collapses and long-term bond yields break through key resistance levels, the market may quickly turn. On May 3, Bank of America's Chief Strategist Michael Hartnett pointed out in his latest report "Boom Loop" that the US nominal GDP is currently in a seven-year expansion period of 75%, with AI investments contributing 75% of GDP growth in the first quarter of this year and government spending has climbed 60% since 2020. These two forces are supporting the strong performance of stocks and commodities, but bonds and the US dollar are under pressure. He considers the 5% level of the 30-year US Treasury bond yield as the "Maginot Line" and expects this level to hold. However, once this line is effectively breached, "the gates to doomsday will begin to open." Fiscal expansion and AI investments create a "boom loop" Hartnett describes the current macro environment as a policy-driven "boom loop". Data shows that the US nominal GDP, which was $20 trillion in 2020, is expected to rise to $35 trillion in 2027, which represents a 75% expansion over seven years. At the same time, the inflation center has moved up from 2% in the 2010s to 4% in the 2020s, and economic growth has slightly increased from about 2.5% to around 2.75%. Against this backdrop, the US GDP grew by 2.0% in the first quarter of this year, with about 75% coming from AI-related investments, highlighting the core contribution of artificial intelligence to the current economic expansion. Hartnett points out that policymakers around the world are responding to deglobalization, populism, and inequality issues with maximum government spending. US government spending has increased by 60% since 2020, and the proposed budget for the 2027 fiscal year will increase by another 15% on top of this. At the same time, geopolitical competition is being driven by inflationary effects in trade, industry, and financial market policies, with the goal of monopolizing the supply of strategic resources such as chips, oil, rare earths, and minerals for AI. In Hartnett's view, this dual drive of fiscal and technological forces is benefiting stocks and commodities in nominal prosperity, while bonds (with steep yield curves) and the US dollar are relatively under pressure. 5% is a key line of defense, bond market collapse is the biggest tail risk Despite the current optimistic market sentiment, Hartnett clearly points out the fatal weakness of this boom loop: the collapse of the bond market. He defines the 5% level of the 30-year US Treasury bond yield as the "Maginot Line" and expects this level to hold. The report states that the logic supporting this judgment is that: The Trump administration is actively maintaining the demand foundation for US bonds - holders in Asia and the Middle East hold a total of about $3.8 trillion in US treasuries, and policy coordination at the exchange rate level is seen as an important means of stabilizing this demand base. In addition, Trump's approval ratings on inflation have dropped to only 29%, which is close to the low of 28% during the Biden era, which also provides political impetus for the government to stabilize the bond market. However, Hartnett also warns that in every past end of a boom or bubble, there has been a sharp jump in yields: in 1989, Japanese government bond yields rose by 230 basis points, and in 1999, US government bond yields rose by 260 basis points. Once the 5% line is effectively breached, "the gates to doomsday will begin to open", and the current boom loop will face a fundamental reversal. This article is reproduced from "Wall Street See News", GMTEight Editor: Feng Qiuyi.