The Trump administration’s policies risk fueling a bubble in parts of the market, BofA said Friday.
The firm cites the combination of lower taxes, lower tariffs, and lower rates being pursued by the White House.
BofA says the policies could incentivize a pronounced rotation out of bonds into crypto and AI.
Bank of America said on Friday that a policy trifecta of lower taxes, lower tariffs, and lower interest rates could fuel a new speculative bubble in markets.
The prediction comes as Donald Trump’s “big beautiful bill,” which would lower taxes among other fiscal measures, sits with the Senate after passing the House of Representatives last week. Meanwhile, Trump continues to pursue trade deals and has ramped up calls for the Fed to lower interest rates.
BofA investment strategist Michael Hartnett said that policy could fuel a “deeper” rotation out of bonds and into a handful of areas of the stock market — most notably AI and the high-flying tech names that make up the Magnificent Seven — as well as crypto.
Hartnett flagged the relationship between the stock and bond markets as a telltale sign of a bubble forming. An inversion of the classic “bonds master, stocks servant” dynamic has been a mark of past speculative frenzies, with this kind of market behavior seen in 12 of the last 14 bubbles, he noted.
The 30-year Treasury touched the highest level since 2008 last week as markets tumbled over fears about the GOP budget bill adding to the US deficit.
“Nothing screams bubble more than equities driving nominal/real yields higher,” Hartnett wrote.
The analysts added that based on past market manias, the Magnificent Seven could see a fresh gain of 30% before the group peaks.
The speculation mentioned by Hartnett may already be underway, with so-called low-quality stocks outperforming the broader market over the past few weeks. This dynamic was first pointed out by Bloomberg in a story published Thursday.
Illustrating this dynamic, a basket of low-quality stocks compiled by UBS — which counts meme stocks like GameStop and AMC among its components — has handily beaten the S&P 500 since its recent bottom on April 8.
Crypto has also seen gains in recent weeks, highlighting the speculative, risk-on mood that’s returned as investors work past the tariff chaos that sparked April’s big sell-off. Bitcoin is trading at fresh records, hitting an all-time high above $112,000 last week.
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