BofA’s Hartnett Says Stock Markets Are Behaving Like Dot-Com Era

The rush into technology stocks is resembling the bubble of 1999, reflecting an assumption that the economy will perform strongly despite tighter monetary policy, according to Bank of America Corp. strategists.

While falling yields were pushing the Nasdaq higher in the fourth quarter, the script has now flipped to both rising over the past four weeks. This price action would typically only occur after a recession, such as in 2009 or the dot-com bubble around the turn of the century, BofA strategists led by Michael Hartnett wrote on a note.

Investors aren’t too bothered about whether the Federal Reserve cuts rate in March or May, he said. The market will view the Fed as bullish for asset prices until inflation picks up again, reducing the scale of rate cuts, or if unemployment rises, which would be a “big macro and market game-changer.”

The so-called Magnificent Seven technology stocks have led the Nasdaq 100 Index’s 54% surge last year amid expectations of imminent rate cuts, a solid economy and optimism about artificial intelligence. The rally has extended into 2024 as investors continue to bet on big tech, with stronger-than-expected results from Meta Platforms Inc. and Amazon.com Inc. likely to provide more momentum.

Federal Reserve Chair Jerome Powell this week pushed back on market bets for a rate cut in March on concerns that inflation remains higher than the central bank’s 2% target.

Hartnett notes that 75% of investors expect a soft landing and 20% a no-landing scenario. Yet, while a soft landing should support a broader range of equities, the Magnificent Seven accounted for 45% of the S&P 500’s return in January, reflecting a “leaning toward no landing/bubble,” he said.

S&P 500 Returns Are Not Much Without the Magnificent 7