A convergence of three distinct pressures is now bearing down on global markets. Bank of America Chief Investment Strategist Michael Hartnett has issued a stark warning in his latest report: record diesel prices, the 30-year Treasury yield surging to its highest level since 2007, and a troubling lack of productivity gains despite the massive AI buildout are together constructing a stagflationary risk for the autumn season.
Hartnett, in his latest analysis, has designated the Transportation ETF (IYT) as the single most critical barometer to watch. He cautions that a decisive break below the 200-day moving average support level of 80 points would confirm a shift from the summer's "best time has passed" macro risk-off positioning into a full-blown autumn stagflation event. Meanwhile, he cautions that a "complacent market combined with a hawkish policy stance creates a breeding ground for volatility," and explicitly states that "it's not too late to hedge against the AI bubble in equity indices."
Recent fund flow data corroborates this subtle but significant shift in market sentiment. Over the past three weeks, average weekly net inflows into US stocks have contracted dramatically to just $7 billion, a sharp decline from the $52 billion peak seen in July. More tellingly, US equities have recorded their largest three-week net outflow, totaling $14.2 billion, a level not seen since January.
While headlines blare about crude oil's return to $100 per barrel, Hartnett points a more urgent finger at the diesel market. In his report, he identifies diesel as the "true stress point for the real economy" – a critical input for shipping, trucking, agriculture, construction, and mining. Currently, diesel crack spreads have touched a record $102 per barrel, and retail diesel prices have hit an all-time high of $6 per gallon. In contrast, crude oil prices remain well below their peaks during the Ukraine crisis. This divergence highlights an unusual pressure building within the refining sector. Hartnett warns that for industrial America, this surge in its most significant input cost simply cannot be ignored.
He has set the IYT Transportation ETF as the core indicator to watch: the ETF is currently testing its 200-day moving average support at the 80-point level. A decisive break below this would formally confirm the stagflation scenario for autumn.
Yields remain elevated, and bonds are losing their diversification appeal as the 30-year Treasury yield climbs to its highest point since June 2007. Despite this, there's no widespread panic in the market. Hartnett invokes historical patterns, noting that "markets typically test policy resolve." He points to examples like the yen testing the 160 level after the joint US-Japan intervention before being pushed back below 154, the 30-year Treasury yield jumping 16 basis points in a single day following the announcement of QE3, and a 51 basis point surge within days of the QE4 announcement. He also observes that the "peak yields" trade is currently working, with long-duration rallies in biotech, regional banks, REITs, and small caps leading the central bank's rate-hiking cycle, yet this rebound is not being supported by synchronized fund inflows.
On the bond allocation front, Hartnett issues a deeper warning: during the era of "secular stagnation" from 2000 to 2019, bonds and stocks had a negative correlation, and yields of 2-3% were almost a bonus. However, with the return of a positive correlation between the asset classes, allocators may now require significantly higher yields to shift into bonds in scale. This suggests that the protective, diversifying benefits of bonds are rapidly deteriorating.
In his most direct critique of the AI boom to date, Hartnett points out that over the past three years, AI-related investments have accumulated to more than $1.5 trillion, yet evidence of economy-wide productivity gains remains scarce. In fact, total factor productivity is now trending below its long-term average, a metric that has shown a strong correlation with consumer confidence over the last 50 years. A side effect of the AI boom is also visible in valuations: the free cash flow yield of the S&P 500 has been squeezed to historic lows. According to Hartnett's data, a portfolio of high free cash flow stocks has risen 37% year-to-date, outperforming the broader market. In the stagflationary year of 2022, this same portfolio was up 9% while the S&P 500 ETF (SPY) fell 18%. His conclusion carries a cautionary tone: "Sometimes, Main Street knows something that Wall Street doesn't."
The latest weekly global fund flow data paints a clear picture of shifting preferences. Bonds attracted $17.5 billion in inflows, cash saw $12.9 billion, stocks took in $9.8 billion, cryptocurrencies added $1.3 billion, and gold gained $600 million. Global bonds have now posted an average weekly net inflow of $18 billion for four consecutive weeks. Investment-grade bonds recorded their 23rd straight week of inflows with $5 billion. Chinese equities posted their first net inflow in six weeks, at $1.1 billion. The materials sector saw its 10th consecutive week of inflows, reaching $1.9 billion. Cryptocurrencies also showed strong momentum, accumulating $6.8 billion in net inflows over the past six weeks.
Hartnett's proprietary sell signal ticked down slightly to 9.5 from 9.6, primarily due to slowing equity inflows and outflows from the healthcare sector. It's worth noting that since the signal triggered on May 2nd, the S&P 500 has gained 1.0% and the global ACWI index is up 1.5%, with no major correction yet. However, Hartnett believes this resilience is precisely what amplifies the pressure for a more significant risk release in the future.