AI bubble may be burst! Bank of America sounds the alarm and suggests paying attention to this indicator
The artificial intelligence bubble may be about to burst! Bank of America has sounded the alarm and advised to pay attention to the 10-year US Treasury real yield and credit spreads to find signals of when the AI-led rally may end. Bank of America believes that once the 10-year US Treasury real yield climbs to the range of 2.5% to 3%, coupled with widening credit spreads, it may trigger market concerns about an economic recession, disrupting the rally and weakening the dominance of mega-cap growth stocks. In addition, there is a differentiation in mega-cap tech stocks, with Tesla and Apple facing challenges in 2024, while giants like Nvidia and Microsoft show no signs of slowing down
According to the Zhitong Finance and Economics APP, Bank of America has coined a phrase to describe the current market: "anything but bond" bull market.
Bank of America pointed out that in the fourth quarter of 2023, stocks and cryptocurrencies have been leading the way. In the first quarter of this year, commodities and cryptocurrencies became market darlings. And so far, the second quarter has been a moment of glory for the US dollar.
While this has brought substantial profits to traders accurately positioning themselves in various asset classes, Bank of America warns that this is a byproduct of massive government spending and could dissipate once several key conditions are met.
One of the most crucial factors is the large tech companies that have long dominated the performance of US stocks, mainly due to their close connection with artificial intelligence. Bank of America stated that the momentum of "anything but bond" has particularly ignited the market's enthusiasm for investing in the largest stocks. As shown in the chart below, the top ten stocks account for a record 34% of the S&P 500 index market value.
However, Bank of America believes that this surging bull market will not last forever. The bank outlined a scenario that could disrupt the uptrend and ultimately weaken the dominance of giant growth stocks: the real yield on 10-year US Treasury bonds rising to the range of 2.5% to 3%. Additionally, the combination of rising yields and widening credit spreads will trigger concerns in the market about an economic recession.
Currently, the real yield on 10-year US Treasury bonds is 2.28%, which means there is still room for further increase in the real yield before triggering selling of heavily weighted large-cap stocks. As shown in the chart below, since October 2023, this yield indicator has hardly exceeded 2.5%, and even if it did, it was only briefly surpassed.
Furthermore, another factor to consider is that mega-cap tech stocks are no longer soaring like unstoppable boulders. The "Big Seven" tech stocks focusing on artificial intelligence have shown internal differentiation, with Tesla (TSLA.US) and Apple Inc. (AAPL.US) facing challenges in 2024, while giants like Nvidia (NVDA.US) and Microsoft (MSFT.US) show no signs of slowing down. It is worth mentioning that Meta (META.US) has seen a performance growth of over 40% this year, but its stock price has plummeted significantly, mainly because its growth rate is not yet enough to please investorsBank of America noted that these differences reduce concentration risk, which may dampen eventual selling pressure. Meanwhile, monitoring the 10-year Treasury real yield will help identify signals of when such a recession might occur