Bank of America (BAC) just raised a not-so-subtle red flag for bond market investors and anyone with a stock market position.
In a new note Flow Show, chief equity strategist Michael Hartnett argued that the “anything but bonds” era is here, and that the traditional safety trade has failed.
Expressing his brief rationale, he said the first half of the 2020s delivered what they mean “humiliation in the bond market,” with long-term government debt suffering unprecedented damage.
For perspective, the data supports Hartnett’s point that long-term government bonds have indeed incurred large and unusual losses.
The iShares 20-Year Treasury Bond ETF (proxy for “long bonds”) massive shed 31% in 2022 (one of her worst years), with the maximum drawdown of almost -47.8% from its peak in 2020 to the end of 2025.
So where does the money go when bonds can no longer protect your portfolio?
Well, BofA’s response is broad and, in many ways, among the most counterintuitive.
Hartnett expects the latter half of the decade to be favourable international stocks, emerging markets, commodities, and goldwith a weaker dollar fueling reflation abroad.
So the AI stocks that have taken all the attention over the past three years may take a backseat to small- and mid-cap players on the back of strong reshoring and industrial rebuilding trends.
Bank of America warns that changing market leadership could challenge investors as bonds lose their safe haven role. Photo by Spencer Platt at Getty Images” loading=”eager” height=”640″ width=”960″ class=”yf-lglytj loader”/>
Bank of America warns that changing market leadership could challenge investors as bonds lose their safe haven role.Photo by Spencer Platt at Getty Images ·Photo by Spencer Platt at Getty Images
BofA’s warning is less about the next big trade and more about the foundation under investment portfolios, which apparently has changed.
Hartnett believes that bonds (the shock absorbers) effectively failed in their primary job, it forces investors to rethink risk across the entire stock market.
That rethinking, Hartnett believes, is already underway.
A weaker dollar, stronger commodity prices, and reflation outside the US will favor international and emerging market stockswho otherwise stayed behind.
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For perspective, the US Dollar Index declined 9% of its value in the last 12 months and went down almost 2% in the last 5 days alone, noted MarketWatch.
To look at the numbers for emerging stocks, let’s take a clean gauge at iShares MSCI Emerging Markets ETF to see how they fared against the tech-heavy S&P 500.
For the full year 2025, here’s how the tape went.
MSCI ETF (EM stocks): +33.98%
SPY (S&P 500): +17.72%
MAGS (Magnificent Seven ETF): +22.99%
Furthermore, the global reflation argument is showing up in the numbers.
The data suggest Japan is no longer in a deflationary era, with Investing.com indicating headline inflation of 2.1% and headline inflation of 2.4% (both hovering over the Bank of Japan target).
China is slightly more irregular, but consumer prices are improving, as CPI increases by 0.8% and Core CPI up 1.2%while factory prices remain mostly deflationary. Meanwhile, the Euro Zone not flirting with outright deflation, either, with near inflation 1.9% and services that are still hot.
In drawing parallels with today’s stock market, Hartnett looks to the 1970s, where the setup feels remarkably familiar.
Investors at that time crowded into the “Nifty Fifty”: dominant stocks of blue-chip growth that almost felt the bullet. So essentially, investors were willing to pay any price for quality.
However, macroeconomic conditions soon changed, driven by rising inflation numbers, government intervention, a weakening dollar, and compression in valuations.
Related: Goldman Sachs quietly renews gold price target for 2026
Although the businesses survived, their stocks took a hit.
That’s exactly the parallel Hartnett is drawing now.
Today’s AI-led megacaps have convinced investors that they are exceptional businesses, but extreme concentration leaves the door open for a major correction if the macro backdrop becomes even slightly less supportive.
This is exactly what IMF chief economist Pierre-Olivier Gourinchas said in a recent piece I wrote, where he talked about the economy being in a weak state.
To be honest, you don’t need to be an active stock market investor to notice how a handful of names like Nvidia and Google have driven much of the business news cycle.
Over the past few years, a small group of AI-linked megacaps have driven stock market returns, and the data shows how skewed the rally has gotten.
The Magnificent 7 now counts for more than 34% of the S&P 500an unusually high number for a small number of stocks.
The top 10 stocks account for nearly 39% of the indexcomfortably above the peak of the late 1990s near 27%.
Poster children like Nvidiathe no-brainer proxy for AI-driven enthusiasm, up by around 240% in 2023 and another 170% in 2024for Investopedia.
In 2025 alone, Nvidia accounted for nearly 15.5% of the S&P 500’s total earningsa staggering statistic, to say the least.
Inflation, politics and policy pressures are effectively changing the entire market backdrop. However, it is not about the scenario of the young man’s day that is unfolding, but about the leadership that turns as new conditions take over.
As the numbers show, we are already seeing it take shape. For perspective, the technology-dominated S&P 500 is up 1% year to date, trailing the Russell 2000’s 7.5% gain over the same period, the Associated Press reports.
The leadership of the sector is not even in technology at the moment.
Here’s a look at the total return performance (dividends included) of major ETFs representing their respective industries through January 23, 2026.
Other Wall Street strategists, incl Jeremy Siegelprofessor emeritus at Wharton and chief economist at WisdomTree, echo the sentiment.
In a recent CNBC interview, Siegel said the long-promised extension of the market’s lead appears permanent, raising questions about the strength of the megacap tech rally.
Related: Top analyst revises Palantir price target ahead of earnings
This story was originally published by TheStreet on January 24, 2026, where it first appeared in the Economy section. Add TheStreet as a Preferred Source by clicking here.