Bank of America's Hartnett: This is the biggest bubble since the railroad bubble. But before selling, wait for two things to happen.

Bank of America Merrill Lynch's chief investment strategist Michael Hartnett has issued the most clear warning of a bubble to date - the current AI-driven market bubble is the largest since the 19th century railroad bubble. However, he also warns investors that it is too early to reduce positions until two key conditions are met. In the latest issue of "Flow Show" report, Hartnett pointed out that the concentration of AI sector market capitalization has approached about 48%, surpassing all historical bubbles such as the 1920s "Roaring Twenties", 1970s "Nifty Fifty", 1980s Japanese stock market, and the 1990s technology-media-telecom bubble, only second to the 63% peak of the 1880s railroad bubble. At the same time, Bank of America's bull-bear indicator has risen to 8.0 this week, officially triggering a reverse sell signal for risk assets, the 17th time since 2002. Despite the clear signals at the top, Hartnett believes that the bulls will not easily exit at this moment. He gives two waiting conditions: the completion of historic IPOs such as SpaceX and OpenAI; and a rise in CPI to 4% to 5% triggering significant policy tightening in the coming months. The 30-year US Treasury bond yield rose to a 19-year high this week, and emerging market currencies are under pressure - the Korean won approaching a 30-year low, the Japanese yen nearing a 35-year low, the Indonesian rupiah and Indian rupee both falling to historic lows, indicating risk is spreading rapidly from the periphery. Hartnett warns that the surge in global capital costs is eroding the periphery of risk assets, including housing markets, consumer sectors, and private equity, and emerging markets have always been the starting point for large-scale flight-to-safety sell-offs. If bond yields and oil prices eventually reassert control over market pricing, the impact on stocks will be equivalent to the S&P 500 index falling more than 1,000 points. Bubble Size: Concentration of market cap approaching historic highs Hartnett describes the current market sentiment as "prices strong, retail investors enthusiastic, and volatility depressed," and describes the current situation as "so full of bubbles". In terms of concentration of market capitalization, if the upcoming blockbuster tech companies listed are included in the AI sector, the concentration of AI-related assets' market capitalization will easily exceed about 48%, surpassing all famous bubble cases in the past century. The only historical record still to beat is the extreme level of 63% of the 1880s railroad bubble at its peak. About a year ago, when many analysts qualitatively compared AI to or surpassing the dot-com bubble as a "super bubble," Hartnett remained cautious, believing that AI was only a "mini bubble" at the time, not the true top. In hindsight, investors who reduced their positions early in anticipation of the bubble bursting missed out on the significant gains that followed. Now, his stance has ... Hartnett gives two bond yield observation indicators: XBI rising to $120, meaning yields are entering a circuit breaker-style surging channel; and XRT breaking through $85, indicating that the bond impact will be delayed. Yield Surges and Emerging Market Currencies Under Pressure Hartnett describes the rise in the 30-year US Treasury bond yield to a 19-year high as a typical path for this round of prosperity and bubble ending. From the geopolitical and input inflation dimensions, the AI wave is reshaping the technological industry landscape in Asia. Asia is becoming an inflation exporter - Korean semiconductor export prices have risen by 148% year-on-year, while DRAM prices have soared by 223%. At the same time, the Korean won is hovering near a 30-year low, the Japanese yen is nearing a 35-year low, and the Indonesian rupiah and Indian rupee are at historic lows. Hartnett warns that the surge in global capital costs is eroding the periphery of risk assets, and emerging markets have always been the starting point for large-scale risk-averse market sentiment. Bonds continue to attract funds, with equity allocations still relatively cold The latest weekly fund flow data shows a clear differentiation. Bonds attracted $30.5 billion in funds, the largest inflow among the major asset classes; stocks only saw $2.4 billion in inflows; cash saw $1.2 billion in inflows; gold saw $1.1 billion in outflows; and cryptocurrencies saw $1.5 billion in outflows. This situation is in line with the high sentiment revealed by the bull-bear indicator - a large amount of funds are chasing yield, but the marginal increase in allocation to risk assets is becoming more cautious. Hartnett clearly distinguishes between the "wealth-price spiral" and the "wage-price spiral": the wealth effect in the stock market does exist, but only benefits a small portion of the population, highlighting the significant wealth disparity. The predicament of the consumer sector is particularly clear. The equal-weighted consumer stocks ratio relative to the S&P 500 has fallen below the low point of the Lehman crisis period, reflecting the difficult situation of highly indebted American consumers. At the same time, Hartnett notes that AI is lowering labor costs (but not employment numbers), coupled with the US government starting to address affordability anxiety and energy inflation issues, the US Strategic Petroleum Reserve (SPR) has decreased by 10% since March, releasing about 41 million barrels, rapidly approaching historic lows. Post-Bubble Layout: Contrarian Opportunities Emerge In terms of forward-looking positioning, Hartnett believes that emerging markets and commodities are still in a structural bull market, and consumer stocks will be the best contrarian investment targets after the bubble bursts. In the field of AI, he points out that the most cost-effective direction from now on will be small-cap technology AI applications and transformers that can disrupt monopolies and duopoly structures - a path highly similar to the historical trend of the technology innovation sweeping traditional giants after the burst of the 1970s "Nifty Fifty" bubble. Hartnett concludes with a sarcastic "spirit of the times quote": "Now everyone believes that stocks are the best hedge against inflation." He clearly refutes this consensus and points out that stocks are not inflation hedges - but this point often becomes "obvious" only afterwards. This article is reproduced from Wall Street News, edited by GMTEight: Jiang Yuanhua.