Bank of America (BAC) just waved a not-so-subtle red flag for bond market investors and anyone positioned in the stock market.
In a new Flow Show note, chief equity strategist Michael Hartnett argued that the era “anything but bonds” is here, and that the traditional safety trade has failed.
In laying out his curt rationale, he said the first half of the 2020s delivered what he terms “bond-market humiliation,” with long-duration government debt suffering unprecedented damage.
For perspective, the data support Hartnett’s point that long-duration government bonds have indeed incurred large, unusual losses.
The iShares 20+ Year Treasury Bond ETF (a proxy for “long bonds”) shed a massive 31% in 2022 (one of its worst years), with the maximum drawdown at nearly -47.8% from its 2020 peak through late 2025.
So where does the money go when bonds can no longer protect your portfolio?
Well, BofA’s answer is broad and, in many ways, among the more contrarian takes.
Hartnett expects the back half of the decade to favor international stocks, emerging markets, commodities, and gold, with a weaker dollar fueling overseas reflation.
So the AI stocks that have hogged all the spotlight over the past three years could take a back seat to small- and mid-cap players on the back of powerful reshoring trends and industrial rebuilding.
BofA’s warning is less about the next big trade and more about the foundation beneath investing portfolios, which has apparently shifted.
Hartnett believes that bonds (the shock absorbers) effectively failed at their primary job, compelling investors to rethink risk across the entire stock market.
That rethink, Hartnett believes, is underway already.
A weaker dollar, stronger commodity prices, and reflation outside the U.S. will favor international and emerging-market stocks, which have otherwise lagged.
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For perspective, the U.S. Dollar Index has shed 9% of its value in the last 12 months and dropped nearly 2% in the last 5 days alone, MarketWatch noted.
To look at the numbers for emerging stocks, let’s take a clean gauge in the iShares MSCI Emerging Markets ETF to see how they’ve fared against the tech-heavy S&P 500.
For the full year 2025, here’s how the tape fared.
On top of that, 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 at 2.1% and core inflation at 2.4% (both hovering above the Bank of Japan’s target).
China is slightly more uneven, but consumer prices are improving, as CPI rises 0.8% and core CPI rises 1.2%, while factory-gate prices remain mostly deflationary. Meanwhile, the Eurozone isn’t flirting with outright deflation, either, with inflation near 1.9% and services still running hot.
In drawing parallels to today’s stock market, Hartnett looks to the 1970s, where the setup feels remarkably familiar.
Investors at the time crowded into the “Nifty Fifty”: dominant, blue-chip growth stocks that almost felt bulletproof. So essentially, investors were willing to pay any price for quality.
However, soon the macroeconomic conditions changed, led by rising inflation numbers, government intervention, a weakening dollar, and a compression in valuations.
Related: Goldman Sachs quietly revamps gold price target for 2026
Though the businesses survived, their stocks took a hammering.
That’s exactly the parallel Hartnett is drawing now.
Today’s AI-driven megacaps have convinced investors they are exceptional businesses, but extreme concentration leaves the door open for a major correction if the macro backdrop becomes even slightly less supportive.
That’s exactly what IMF chief economist Pierre-Olivier Gourinchas said in a recent piece I wrote, where he talked about the economy being on shaky ground.
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 has spearheaded stock market returns, and the data demonstrate how skewed the rally has gotten.
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The Magnificent 7 now accounts for more than 34% of the S&P 500, an unusually high number for a handful of stocks.
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The top 10 stocks account for nearly 39% of the index, comfortably above the late-1990s peak near 27%.
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Poster children such as Nvidia, the no-brainer proxy for AI-driven enthusiasm, skyrocketed roughly 240% in 2023 and another 170% in 2024, per Investopedia.
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In 2025 alone, Nvidia accounted for nearly 15.5% of the S&P 500’s total gain, a staggering statistic, to say the least.
Inflation, politics, and policy pressures are effectively changing the entire market backdrop. However, it’s not about a doomsday scenario unfolding, but about leadership rotating as new conditions take hold.
As the numbers show, we’re already seeing that take shape. For perspective, the tech-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 sector leadership is not in tech right now, either.
Here’s a look at the total-return (dividends included) performance of major ETFs representing their respective industries through Jan. 23, 2026.
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Energy (XLE): +10.02% YTD
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Materials (XLB): +10.19% YTD
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Consumer staples (XLP): +6.73% YTD
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Industrials (XLI): +5.87% YTD
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Technology (XLK): +0.78% YTD
Source: totalrealreturns.com
Other Wall Street strategists, including Jeremy Siegel, professor emeritus at Wharton and chief economist at WisdomTree, echo the sentiment.
In a recent CNBC interview, Siegel said the long-promised broadening of market leadership appears durable, raising questions about the strength of the megacap tech rally.
Related: Top analyst revisits Palantir price target ahead of earnings
This story was originally published by TheStreet on Jan 24, 2026, where it first appeared in the Economy section. Add TheStreet as a Preferred Source by clicking here.