AI Bubble, Diesel Shock, Surging Yields! Bank of America’s Hartnett Warns of Approaching Autumn Stagflation Risk

Triple pressures are converging on the market.

Bank of America Chief Investment Strategist Michael Hartnett issued a warning in the latest edition of the "Flow Show" report: Record-high diesel prices, 30-year US Treasury yields surging to their highest levels since 2007, and productivity concerns hidden beneath the AI boom are together forming a risk of autumn stagflation.

Hartnett identified the Transportation ETF (IYT) as the most crucial indicator to watch at present. He noted that if IYT falls below the 200-day moving average support level of 80 points, it will confirm that the macro de-risking that began as “the best timing of summer has passed” is officially evolving into an autumn stagflation event. Meanwhile, he warns, “A calm market combined with tough policies is a breeding ground for volatility,” explicitly stating that “it is not too late to hedge against the AI bubble in indexes.”

Fund flow data also confirms the subtle shift in market sentiment. Over the past three weeks, U.S. stocks had an average weekly net inflow of only $700 million, a sharp decrease from the peak of $5.2 billion in July; U.S. equities recorded the largest three-week net outflow since January 2026, totaling $1.42 billion.

Diesel is the true pressure point

Although headlines are dominated by crude oil prices returning to $100 per barrel, Hartnett points out a greater warning in the diesel market. He clearly states in the report that diesel is the “core stress point of the real economy”—shipping, trucking, agriculture, construction, and mining are all highly reliant on diesel.

Currently, the diesel crack spread has reached a record $102 per barrel, while retail diesel prices have also hit a record high of $6 per gallon. In comparison, crude prices remain well below the peaks seen during the Ukraine crisis, and the disconnect between the two highlights the abnormal pressure on the refining sector.

Hartnett warns that for industrial America as a whole, this spike in the largest input cost cannot be ignored. He cites the IYT transportation ETF as the core indicator: it is now testing the 200-day moving average support at 80 points, and a decisive break below that will officially confirm the onset of autumn stagflation.

High Yields, Fading Diversification Effect of Bonds

30-year US Treasury yields have risen to their highest level since June 2007, yet the market as a whole does not show signs of panic.

Hartnett refers to historical patterns: “Markets tend to test policy resolve”—after the US-Japan joint intervention on July 31, 2026, the yen tested the 160 mark before being pushed back below 154; after the QE3 announcement in 2012, the 30-year Treasury yield jumped 16 basis points in one day; a few days after QE4 in 2020, yields surged 51 basis points.

He also notes that the current “peak yield” trade is working, with long-duration rebounds in XBI, KRE, REITs, and small-caps starting even before central banks’ rate hikes, but these rebounds have not been accompanied by simultaneous fund inflows.

At the asset allocation level, Hartnett issues a deeper warning: In the “secular stagnation” era from 2000 to 2019, bonds and equities were negatively correlated and yields of 2% to 3% were almost a bonus. But now, the results of the two asset classes are once again positively correlated, so allocators may require even higher yields to shift en masse to bonds, and the diversification benefit of bonds is fading rapidly.

AI Bubble Concerns: Productivity Data Issues a Warning

Hartnett questioned the AI boom in the most direct terms to date in his report. He pointed out that over the past three years, AI-related investments have totaled over $1.5 trillion, but there is still a lack of evidence for substantial productivity improvements across the economy—Total Factor Productivity (TFP) is falling below its long-term trend line, and this indicator has been highly correlated with consumer sentiment over the past 50 years.

Another side-effect of the AI hype has been reflected in valuations: The S&P 500’s free cash flow yield has been pushed to historic lows. Hartnett’s data shows that high free cash flow stock baskets (VFLO) are up 37% year-to-date, outperforming the broader market; in 2022, a typical stagflation year, this basket rose 9% while the S&P 500 ETF (SPY) fell 18% in the same period.

His conclusion is quite cautionary: “Sometimes Main Street knows something Wall Street doesn’t.”

Fund Flows: Declining Equity Appeal, Bonds and Crypto Favored

The latest weekly global fund flow data shows: Bonds attracted $17.5 billion, cash inflows totaled $12.9 billion, equities saw $9.8 billion in inflows, crypto attracted $1.3 billion, and gold $600 million.

Specifically, global bonds have had an average weekly net inflow of $18 billion for the past four weeks; investment-grade bonds recorded a 23rd consecutive week of net inflow with $5 billion in the latest week; Chinese equities saw their first net inflow in six weeks at $1.1 billion; materials sector marked a 10th consecutive week of net inflows at $1.9 billion; crypto accumulated net inflows of $6.8 billion over the past six weeks, showing strong momentum.

Hartnett’s proprietary sell-side indicator fell slightly this week from 9.6 to 9.5, mainly due to slowing equity inflows and outflows from healthcare. Notably, since the indicator triggered a sell signal on May 2, the S&P 500 has risen by 1.0% and the global ACWI benchmark is up 1.5%. The market has yet to see a clear pullback, but Hartnett believes this only increases the pressure for risk to be realized going forward.