BofA’s Hartnett says US tech in a bubble that’s waiting to pop

A host of similarities between tech stocks now and previous bubbles suggest the Magnificent Seven is nearing — but not yet at — levels that may lead it to pop, according to Bank of America Corp. strategists.

They cite a handful of indicators, such as bond yields, valuations and price action, that suggest there are further gains ahead of the group that includes Apple Inc. and Amazon.com Inc.

Bond yields adjusted for inflation, seen as a proxy for tight financial conditions, are a common way for stock-market bubbles to burst, wrote the team led by Michael Hartnett. By their math, given all of the debt sloshing around the global financial system, the real yield, which subtracts inflation from the Treasury 10-year yield, would have to reach 2.5% or 3% to end the investor craze for artificial intelligence and megacap tech. It’s currently about 2%.

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Valuations are another reason. With a price-earning ratio of 45, the Magnificent Seven group is expensive by any stretch. But Hartnett’s research shows that past rallies reached even more extreme levels before hitting a peak, with multiples of 67 for Japanese stocks in 1989 and 65 for the Nasdaq Composite in 2000.

“It ain’t cheap,” Hartnett wrote, “but true that bubble highs have seen dafter valuations.”

Another metric that Hartnett’s team’s mention is that the gains are smaller than other bubbles measured trough-to-peak. Since a low in December 2022, the Magnificent Seven has jumped about 140%. It’s not quite the 190% surge seen during the Internet bubble for the Nasdaq Composite or the 230% rally of FAANG stocks from Covid lows, the strategists said.

Agencies

A skeptical reading of the data might be that these are still warning signs for investors hoping to keep riding the rally. And indeed, Hartnett points out that there are “no two bubbles alike.”

The appetite for tech stocks has been relentless this year, with an index of Magnificent Seven notching additional almost 12% so far in 2024. And the latest fund flow data shows global investors are adding to their bets.

About $2.3 billion was added to funds focused on tech stocks, Hartnett said, citing EPFR data in the week through Feb. 14. Almost $60 billion flooded into stock funds in the past four weeks, the biggest such splurge in two years. Futures contracts on the Nasdaq 100 Index rose 0.5% on Friday.

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