Bank of America’s Hartnett, who accurately predicted major declines: “Sell signal” is over, investors will "return to tech stocks in mid-November”, the key lies in “chip prices”

BofA Securities strategist Michael Hartnett, who previously accurately predicted the tech stock downturn, now reports that his "sell signal" indicator has ended. However, he emphasizes that the end of the signal does not mean a buy signal has been triggered. Whether investors can return to tech stocks in mid-November depends on one key variable: the trend in semiconductor prices.

In the latest Flow Show report, Hartnett points out that the BofA Bull & Bear Indicator dropped sharply from 8.1 to 7.4, falling below the 8.0 threshold and officially ending the sell signal triggered on May 26. Tactically, however, he remains "defensive" and lists two prerequisites for returning to risk assets: the Federal Reserve raising rates on October 28 to restore credibility, and relief of AI financing concerns—neither of which have materialized so far.

The probability of a Fed rate hike in October has plummeted from over 50% to 14%, while the AI credit market just experienced its worst week this year: CoreWeave bonds fell into distressed levels, with its 5-year CDS spread signaling a roughly 63% probability of default; the Nasdaq 100 index fell nearly 6% in a single week, marking its worst performance since “Liberation Day.” Hartnett warns that if semiconductor prices decline, it will signal further tightening of AI credit and a peak in capital expenditure growth. In that case, market returns in 2027 will shift from capital appreciation to yield-driven.

The BofA Bull & Bear Indicator plunged by 0.7 points this week to 7.4. The key factors contributing to the decline include: weakening breadth in global equity indices, hedge funds holding short positions in crude oil and S&P 500 futures, a reduction in gold futures long positions, and softer fund flows into high-yield and emerging market debt. The only countertrend driver was the sustained net inflow of capital into tech stocks.

Hartnett also noted that the “legacy” Bull & Bear Indicator fell from 5.6 to 5.1, below its recent September 1 high of 8.0. Both versions convey a consistent message: the period of extreme optimism in summer has ended.

However, cooling sentiment does not mean a genuine withdrawal of capital. BofA's breadth rules show that a net 52% of global equity indices are “oversold” (below their 50- and 200-day averages), the highest since April 2025. But a reverse buy signal would require the oversold proportion to reach a net 88%. Hartnett believes this threshold won’t be met soon unless the currently “overbought” US, Taiwan, and Brazil stock markets fall another 6% to 10%.

Though sentiment is cooling, risk exposure in asset allocation remains highly concentrated. The latest weekly EPFR data (as of this Wednesday) shows $64.4 billion net inflow into equity funds, $11.8 billion into bonds, and a $53.1 billion outflow from cash—meaning the tech stock selloff has left little trace in fund flow data.

BofA private clients currently have a record 66.4% of their assets in stocks, with cash holdings down to a historic low of 9.3%. For the year as a whole, global equity fund annualized net inflows for 2026 reach $1.3 trillion, with tech funds hitting $196 billion, more than 2.5 times the previous record. The October BofA Fund Manager Survey shows that investors’ overweight positions in tech stocks are at the highest since August 2020.

The Korean market shows the starkest divergence between positioning and price: the KOSPI has fallen 30% from its June high, but since the August peak, only $7 has been withdrawn for every $100 that flowed in. Hartnett points out that foreign investors led the selling this week, and the share buyback window is nearly closed, meaning true divestment may not have even begun.

Hartnett remains defensive for three main reasons: First, the US 10-year real yield is approaching 3%, a level historically associated with risk events such as the bursting of the Tech Bubble, the Global Financial Crisis, and the SVB event.

Second, Private Equity ETF (PSP) and Business Development Company ETF (BIZD) have already fallen back to early 2026 lows. Third, Oracle's 5-year CDS has spiked vertically, while investment grade tech bond spreads remain flat, indicating that the most highly leveraged borrowers are under the greatest stress.

According to Goldman Sachs rates strategist David Curtin, the cost of AI infrastructure financing is one of the top sources of market pressure—total financing costs of 6% to 8% for sub-investment grade borrowers "bite faster" in a high-rate environment.

Goldman Sachs data shows that CoreWeave’s 2031 bonds have at points traded at a spread of over 1,100 basis points above Treasuries.

Market consensus cited by Hartnett suggests that hyperscale cloud capital expenditure is expected to reach $807 billion in 2026 and rise to $1.16 trillion in 2027, while free cash flow is projected to turn negative $63 billion this year and widen to negative $163 billion next year. Goldman data also shows that after nearly 30 years of decline, the chip producer price index has recently spiked sharply.

Hartnett makes the following forward-looking judgment: the trend in semiconductor prices will dominate macroeconomics and market layout as we move toward 2027.

If chip prices continue rising, it means the US-China AI arms race will persist, the expectation of implicit government support for bond and stock prices will be sustained, investors will return to tech stocks in mid-November, and the "short tech, long bonds" trade will be reversed by 2027.

Conversely, if semiconductor prices decline, it means further tightening of AI credit, a peak in AI capital expenditure growth, and the underlying logic supporting US nominal GDP prosperity will start to unravel—the US nominal GDP has grown 63% to $33 trillion from the COVID low, with surging chip prices playing a key role. At that point, bonds will likely outperform, and any asset priced on the AI capex narrative will come under significant pressure, with yield-taking over as the core driver of asset returns in 2027, replacing capital appreciation.

On the operational level, Hartnett chooses to increase allocation to assets benefiting from "peak yields," including small caps, REITs, and the discretionary sector, which BofA’s October Fund Manager Survey shows is the most underweighted since July 2008. He makes it clear that he is not increasing tech exposure at this time.

In longer-term asset allocation, Hartnett maintains an overweight in gold, commodities, and emerging markets, while advising that long positions in “short bonds” and underweights in China should be gradually pared back—an obvious shift in his stance.

Hartnett also notes via "price signals" that among the S&P 500 constituents, 355 stocks are more than 10% below their 52-week highs, 188 are more than 20% below, and 93 are more than 30% below. Beneath the calm index surface, individual stock damage is considerable, potentially creating a value opportunity for patient investors waiting for their chance to re-enter.