Bank of America strategist Michael Hartnett suggests 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—a collapse in the bond market and a breach of key resistance levels for long-term Treasury yields could prompt a swift market reversal. In his recent report titled "Boom Loop," published on May 3, Hartnett, BofA's chief investment strategist, noted that U.S. nominal GDP is in the midst of a seven-year expansion cycle with 75% growth. AI investments accounted for approximately 75% of the GDP growth in the first quarter of this year, while government spending has surged by 60% cumulatively since 2020. These two forces are jointly supporting robust performance in stocks and commodities, but are putting pressure on bonds and the U.S. dollar. Hartnett identifies the 5% yield level on the 30-year U.S. Treasury as a critical defensive line, akin to the "Maginot Line," and expects it to hold. Nevertheless, if this line is decisively breached, he warns that "the gates of doom will begin to open."
Fiscal expansion and AI investment are constructing what Hartnett characterizes as a policy-led "boom loop." Data indicates that U.S. nominal GDP, which stood at $20 trillion in 2020, is projected to rise to $35 trillion by 2027, representing a 75% expansion over seven years. Concurrently, the core inflation rate has shifted upward from an average of 2% in the 2010s to around 4% in the 2020s, while economic growth has edged up from approximately 2.5% to about 2.75%. Against this backdrop, U.S. GDP grew by 2.0% in the first quarter, with AI-related investments contributing roughly 75% of that growth, underscoring the central role of artificial intelligence in the current economic expansion.
Hartnett points out that policymakers worldwide are responding to challenges such as deglobalization, populism, and inequality with the most aggressive government spending measures. U.S. government expenditure has increased by 60% since 2020, and the proposed budget for fiscal year 2027 would add another 15% on top of that. At the same time, geopolitical competition is being advanced through trade, industrial, and financial market policies that have inflationary effects, with the aim of monopolizing the supply of strategic AI resources like semiconductors, oil, rare earths, and minerals. In Hartnett's view, this dual engine of fiscal and technological drivers benefits stocks and commodities within a context of nominal prosperity, while bonds, evidenced by a steepening yield curve, and the U.S. dollar face relative pressure.
Despite the current optimistic market sentiment, Hartnett clearly identifies the Achilles' heel of this boom loop: a potential bond market collapse. He defines the 5% yield on the 30-year U.S. Treasury as the "Maginot Line" and expects it to hold. The report states that this judgment is supported by the logic that the Trump administration is actively working to maintain the base of buyers for U.S. debt—Asian and Middle Eastern holders collectively hold about $3.8 trillion in U.S. Treasuries, and policy coordination at the exchange rate level is seen as a key means to stabilize this demand. Furthermore, Trump's approval rating on inflation has fallen to just 29%, nearly matching the low of 28% during the Biden era, which also provides political motivation for the government to stabilize the bond market.
However, Hartnett also cautions that historically, the end of every 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 decisively breached, "the gates of doom will begin to open," and the current boom loop would face a fundamental reversal.
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