Bank of America says growth stock bubbles exceed the “Internet” and “Nifty Fifty” era – warns them that they can drop the S&P 500 by 40%
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Bank of America warns that the bubble of growing U.S. stocks echoes the “Nifty Fifty” and “Dot-Com” eras.
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BOFA said U.S. stock concentration is higher than historical norms.
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Bofa said investors should consider diversification and focus on quality stocks to mitigate risk.
If you listen carefully among all the investors cheering on AI, the echoes of some huge bubbles in history began to echo through the narrow skyscraper canyons on Wall Street.
This is the U.S. warning bank strategist sent to clients earlier this week.
The bank said that as investors continue to pour into growing stocks, sometimes passively, the market has begun to resemble the so-called “Nifty 50” and “Dot-Com” bubbles, in the 1960s and the late 1990s, respectively. Although stocks can still rise in the near future, the results during these well-known bubble periods suggest that trouble may occur.
This argument is based on concentration in the market. Compared with the rest of the world, the market value of U.S. stocks is 3.3 standard deviation compared to historical norms.
In the United States, the five largest stocks in the S&P 500 are now 26.4% of the index.
The market value of the “New Economy” stocks in the S&P 500 also accounts for more than half of the index’s total value, a record.
Woodard said part of the reason why the market is so concentrated is due to passive investment, where investors shovel funds to indexes.
“Passive funds mainly have a market share of 54%,” he wrote.
“Passively ignoring valuations and fundamentals means the advantage of innovation, but there is a lot of risk in the bust,” Woodard continued.
These concentration levels can mean long-term pain for investors – just like after the “Nifty 50” and “Dot-Com” bubbles.
“Momentum reversal becomes unusually sharp,” wrote Jared Woodard and Bank of America’s investment and ETF strategists.
“If eight sectors outside the ‘New Economy’ darling would hit 10%, while a few Mega Cap Tech stocks fell 10%, the index was generally flat,” he continued. “Not very healthy or diversified. ”
Woodard’s tough decade warnings for investors in recent months are in line with the perceptions of strategists at other major Wall Street banks. Morgan Stanley’s Mike Wilson said in December that the S&P 500 will see a decade of “flat” returns, while Goldman Sachs’s David Costin David Kostin said the index will return an average of 3% per year over the next 10 years.
