Bank of America warns about the US growth stock bubble. It reflects the era of “Nifty Vifty” and “.com”. The enrichment of US stocks has far surpassed historical norms. said Bofa.
Among all the investors cheering for AI, some echoes of some of the big bubbles in history are beginning to echo through the narrow canyons of Wall Street skyscrapers.
This is the warning Bank of America strategist issued to clients in a memo earlier this week.
As investors continue to accumulate growth stocks at times passively, the markets resemble the so-called “Nifty 50” and “.com” bubbles in the 1960s and late 1990s respectively. And while inventory still could grow in the short term, the results after those famous bubble periods suggest that trouble could come.
The discussion was based on the level of market concentration. The market capitalization of US stocks compared to other parts of the world is 3.3 standard deviations, away from historical norms.
Bank of America
In the US, the five largest stocks in the S&P 500 are currently 26.4% of the index.
Bank of America
The market capitalization of the S&P 500’s “New Economy” stocks also consists of more than half the index’s total, a record high.
Bank of America
According to Woodard, part of the reason the market is so concentrated is due to passive investments that allow investors to indiscriminately narrow their money down the index.
“Passive funds dominate with a market share of 54%,” he writes.
“Passive neglect of assessment and foundations means a great advantage from innovation,” Woodard continued.
These concentration levels can mean long periods of pain for investors. This is as it did after the “Great 50” and “.com” bubbles.
“The momentum reversal is unusually sharp. A ‘new economy’ drawdown of over 50% (small than DOT COM) could drag the entire index down 40%.” 11 notes.
“If eight sectors other than the ‘New Economy’ darlings attract 10% and a handful of MegaCap Tech stocks fall 10%, the entire index will still be flat,” he continued. “I’m not very healthy or diverse.”
Bank of America
Woodard’s warnings for investors a difficult decade ahead have been consistent with the views of other major Wall Street bank strategists over the past few months. Morgan Stanley’s Mike Wilson said in December that the S&P 500 will return to the 10-year “Flatish” and Goldman Sachs’ David Costin said the index averages annually over the next 10 years. He said he would return 3%.
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How to avoid potential drawdowns
The banks laid out the playbook for a way to avoid potential bear markets and avoid the “lost decade” of the future.
First, Woodard said he would monitor the S&P 500 Equal Weight Index to beat the Cap-weighted Index.
“The similarly weighted S&P 500 index has surpassed the market capitalization index by 1PPT/year since 1958. There were five periods where the cap-weighted index exceeded. It usually lasted for 16 quarters,” Woodard said. is writing. “Today, CAP-weighted indexes are overpurchasing 2.5 standard deviations compared to long-term trends.”
Bank of America
Second, Woodard said he will consider investing in a basket of high quality stocks with further exposure to seven spectacular stocks. Examples of funds that provide exposure to quality equity include: iShares MSCI USA Quality GARP ETF (GARP); Wisdomtree US Quality Growth Fund (QGRW).
And thirdly, diversifying. Woodard said Derek Harris is head of the US bank’s global wealth and investment management portfolio strategy.
