One Wall Street veteran walks investors through his post-bubble playbook. – AFP via Getty Images
It might not be today, it might not be tomorrow, but at some point, this bull market is going to end.
So far, the roaring bull market that began in late 2022 has overcome every obstacle in its path. But since the start of the second quarter, skeptics have identified a number of warning signs that are making them increasingly uncomfortable. Some Wall Street veterans, including Michael Hartnett, a strategist at BofA Global Research, think the stock market has reached the late innings of the market cycle.
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The S&P 500 Index SPX was up 28.2% on Tuesday from a year ago, while the Nasdaq Composite Index COMP was 40.8% higher and the Dow Jones Industrial Average DJIA was up 21.3%, according to FactSet.
Over the past couple of weeks, investor sentiment, positioning and expectations surrounding the pace of growth for corporate profits have all reached levels that look extreme relative to history, Hartnett pointed out in commentary recently shared with MarketWatch. A lopsided rally has left the market dangerously dependent on hot tech and AI-linked names. Although some beaten-down software stocks have staged a strong recovery, many other hard-hit industry groups have continued to struggle.
All of this is happening as investors face what Stephen Innes, managing partner at SPI Asset Management, described as a unique combination of risks in the months ahead. Accelerating inflation, shifting central-bank policy and a coming torrent of equity issuance, with the expected IPOs of SpaceX, Anthropic and OpenAI, could work together to dampen demand for stocks. And once a selloff really gets going, it could snowball.
BofA’s Hartnett is of the view that the stock market is caught up in a bubble, and that it will end badly for investors. Many disagree, arguing that aggressive expectations for earnings growth can in part justify the parabolic move higher in semiconductor names and other hot stocks. Fortunately, if Hartnett is proven correct, investors still have a pretty clear road map for how they can minimize their losses — if history is any guide.
Hartnett offers his post-bubble investor road map since 1929, which is long bonds, and long a combination of defensives and/or sectors that “dramatically underperformed in the last months of the bubble,” Hartnett wrote in a recent report.
In other words, investors need to be “long humility and short hubris,” Hartnett said.
While stocks are looking toppy, bonds have been struggling. Yields on long-dated Treasury bonds like the 30-year BX:TMUBMUSD30Y recently eclipsed 5% and touched their highest levels in nearly two decades. So far in 2026, the three worst-performing sectors on the S&P 500 have been financials, healthcare and consumer discretionary.
Harnett then walked investors through four historical examples that showed how markets have fared after previous crashes.
The Roaring ’20s: Driven by easy credit and an industrial build-out of new technologies like the radio and the telephone, this historic bubble peaked on Sept. 3, 1929. In the six months that followed, the bubble’s leaders — utilities, industrials and banks — dragged the broader index down. At the same time, energy shifted from a massive underperformer into the market’s biggest outperformer.
1980s Japanese euphoria: Fueled by loose monetary policy and a runaway real-estate market, Japan’s bubble peaked on Dec. 29, 1989. Over the next two quarters, real estate and banks were decimated. However, a sharp weakening of the Japanese yen triggered a massive secular outperformance for Japanese exporters, specifically automotive and electronics stocks.
The dot-com crash: Triggered by Federal Reserve rate cuts that followed the internet investing mania and the collapse of Long-Term Capital Management, the Nasdaq composite roughly doubled in its final six months before peaking on March 10, 2000, while the S&P 500 equal-weighted index fell during the 12 months leading up to the top.
In the year that followed, the tech index shed 60% of its value, while humiliated defensive names staged a massive comeback, with utilities and consumer staples gaining 25% and 24%, respectively.
China’s 2007 infrastructure boom: Led by a property and construction rush, materials and industrials stocks surged threefold into the October 2007 top, only to collapse 65% to 85% a year later. The previous laggards — staples, utilities, and technology — then stepped up to outperform.
For now, Hartnett expects that the rally can keep on rocking until the Federal Reserve, now led by Chair Kevin Warsh, is forced by accelerating inflation to try tightening financial conditions. In the end, it will probably be an aggressive Fed and rising bond yields that puts a stop to this bull run, Hartnett said.
