Optimal Strategy Under AI Bubble: Long Tech Leaders and Undervalued Assets, Short AI Bonds

On August 15, Chief Strategist Michael Hartnett pointed out in his latest research report that the optimal investment strategy in the current AI bubble environment is to simultaneously go long on AI tech leaders and long-neglected distressed assets, in order to capture bidirectional returns during the final peak phase of nominal GDP bubble, while also recommending to short AI bonds. The bull-bear indicator slightly fell from 9.7 to 9.3, remaining in the extreme bullish range and maintaining a "sell" signal, but global stock markets have still recorded gains since the signal was issued in May. The report emphasizes that funds are structurally flowing into gold and commodities, while tech stocks have seen the largest weekly outflow in seven weeks, with private client stock positions reaching a historic high.

Hartnett believes that historical bubble patterns show that before the peak of a dominant bubble, emerging markets or cyclically undervalued assets often benefit from spillover effects, and the consumer sector is currently the most likely to replicate this path. Meanwhile, over $1 trillion in AI capital expenditures combined with negative cash flow will exert significant issuance pressure on related bonds. At the same time, the report maintains a broad asset framework of "avoiding bonds, avoiding the dollar, fully invested in AI," and points out that soaring bond yields, cautious voter sentiment, and generally long positions are three potential constraints suppressing further upward movement in the bull market. Data from private clients shows that stock allocation has risen to a historic high of 66.4%, while cash and bond proportions have dropped to the lowest recorded levels and the lowest since 2022, respectively.

Faced with the pressure of U.S. national debt approaching $40 trillion and rising debt servicing costs, the report views yield trends as the biggest variable and notes that interventions in the USD/JPY exchange rate have signaled a desire to prevent the 10-year U.S. Treasury yield from exceeding 5%. Under the theme of "avoiding the dollar," the report recommends going long on gold as a hedging tool, while also favoring the Hong Kong real estate sector, which has a valuation of only about 12 times and is at the same level as 30 years ago. Looking ahead, the November U.S. midterm elections are listed as a key political variable: if the Republican Party retains the Senate and the Texas governor is re-elected, AI risk assets are expected to accelerate towards their peak by 2027; conversely, this could trigger significant adjustments in the stock market, the dollar, and yields.

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