Summary
- Bank of America’s Michael Hartnett said the current concentration in AI trades in the U.S. stock market resembles conditions just before the 2000 dot-com bubble burst.
- Hartnett said only AI-related assets such as the Nasdaq 100 and the Magnificent Seven (M7) are being bought, while the equal-weight S&P 500 index is being ignored, calling it the biggest bubble since railroads.
- Hartnett said investors should gradually increase their bond allocations in a high-interest-rate environment and use a 'buy humiliation' strategy to buy assets that have fallen out of favor with the market.
Forecast Trend Report by Period
The concentration of investor money in artificial intelligence-related trades in the U.S. stock market now resembles conditions just before the 2000 dot-com bubble burst, according to a Bank of America analysis.
BlockBeats reported on October 4 that Michael Hartnett, Bank of America’s chief investment strategist, wrote in a recent report that the market is buying AI-linked assets such as the Nasdaq 100 and the Magnificent Seven, while shunning areas with less AI exposure, including the equal-weight S&P 500 index. He added that the comparison with 1999 remains valid.
In the six months before the dot-com bubble peaked in March 2000, U.S. technology stocks rose more than 40%, while consumer staples fell more than 30%. All other sectors outside technology and telecommunications also weakened. Hartnett said a similar pattern is now unfolding, with AI and megacap technology stocks leading gains while most shares across the broader market remain under pressure from high interest rates.
Hartnett described AI as the biggest bubble since railroads. Capital spending by hyperscale cloud companies is projected to rise to 3.5% to 4% of U.S. gross domestic product next year. That would still be below the roughly 5% reached during the 19th-century railroad construction boom.
He said it remains difficult to conclude that the AI boom has already peaked. Semiconductor prices are still rising, setting the current cycle apart from the late stage of the railroad investment boom, when freight rates fell after excess supply emerged. At the same time, railroad investment then benefited from falling Treasury yields, while today’s market faces the headwind of elevated rates.
Hartnett argued that investors should gradually increase bond allocations. He also recommended a “buy humiliation” strategy, or buying assets the market has shunned and marked sharply lower.
The yield on the U.S. 10-year Treasury recently rose to 5.33%, the highest level since 2002. Rising bond yields mean falling bond prices.
