Bank of America's Michael Hartnett argues that the ongoing rally in U.S. equities is being driven by a combination of substantial government fiscal expenditure and investments in artificial intelligence, creating a self-reinforcing "boom loop." However, this cycle has a clear breaking point—should the bond market collapse and long-term Treasury yields breach critical resistance levels, a swift market reversal could occur.
In a recent report titled "Boom Loop" released on May 3, Hartnett, Bank of America's chief strategist, highlighted that U.S. nominal GDP is in the midst of a seven-year expansion cycle with 75% growth. AI investments accounted for 75% of the GDP growth in the first quarter of this year, while government spending has surged by a cumulative 60% since 2020. These two forces are jointly supporting robust performance in equities and commodities, though bonds and the U.S. dollar are under pressure.
Hartnett identifies the 5% yield level on the 30-year U.S. Treasury as a "Maginot Line" and expects it to hold. However, should this defensive line be decisively breached, he warns that "the gates to doom would begin to open."
Fiscal expansion and AI investment are constructing what Hartnett terms a "boom loop" in the current macroeconomic environment. Data indicate that U.S. nominal GDP, which stood at $20 trillion in 2020, is projected to reach $35 trillion by 2027, representing a 75% expansion over seven years.
Concurrently, the core inflation rate has shifted upward from 2% in the 2010s to approximately 4% in the 2020s, while economic growth has modestly increased from around 2.5% to about 2.75%. Against this backdrop, U.S. GDP grew by 2.0% in the first quarter of this year, with roughly 75% of that growth attributable to AI-related investments, underscoring the central role of artificial intelligence in the current economic expansion.
Hartnett notes that policymakers globally are responding to challenges such as deglobalization, populism, and inequality with the most aggressive government spending measures. U.S. government expenditure has risen by 60% since 2020, and the proposed budget for fiscal year 2027 would add another 15% on top of that. Meanwhile, geopolitical competition is advancing through trade, industrial, and financial market policies that have inflationary effects, with the aim of monopolizing the supply of strategic AI resources such as chips, oil, rare earths, and minerals.
In Hartnett's view, this dual engine of fiscal and technological drivers benefits stocks and commodities amid nominal prosperity, while bonds—evidenced by a steepening yield curve—and the U.S. dollar face relative pressure.
Despite the prevailing optimistic market sentiment, Hartnett clearly identifies the Achilles' heel of this boom loop: a potential collapse in the bond market. He defines the 5% yield on the 30-year U.S. Treasury as the "Maginot Line" and anticipates that this level will be defended.
The report outlines the reasoning behind this assessment: The Trump administration is actively working to maintain demand for U.S. Treasuries among Asian and Middle Eastern holders, who collectively hold approximately $3.8 trillion in U.S. government debt. Policy coordination at the exchange rate level is seen as a key measure to stabilize this buyer base. Additionally, with public approval ratings on inflation handling dipping to just 29% for Trump—nearly matching the low of 28% during the Biden administration—there is political impetus for the government to stabilize the bond market.
However, Hartnett also cautions that the end of every historical boom or bubble has been accompanied by a sharp spike in yields: Japanese government bond yields rose by 230 basis points in 1989, and U.S. Treasury yields increased by 260 basis points in 1999. Should the 5% defensive line be effectively breached, "the gates to doom would begin to open," fundamentally reversing the current boom cycle.
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