Bank of America strategist flags dot-com bubble signals in AI-driven rally

Bank of America strategist Michael Hartnett has warned that the current US stock market exhibits characteristics similar to the 1999–2000 dot-com bubble, driven largely by artificial intelligence (AI) stocks. Despite the S&P 500 reaching record highs, Hartnett noted that market breadth is narrow, with a significant portion of recent record closers tied directly to AI. He advises clients to adopt a defensive position, citing historical patterns where speculative price action preceded market corrections.

In a research report published in late May, Hartnett pointed to the S&P 500 as evidence that the market is following a path eerily similar to the dot-com bubble. At the time, the index had closed at a record of 7,580.06 on 29 May. Since then, the index has risen further to a record high of 7,798.99 on 13 August, marking its 27th record close of the year. However, Hartnett’s concern centres not on the records themselves, but on the companies driving these new highs.

Hartnett observed that on 29 May, 20 of the S&P 500 stocks closed at a record high. Of those 20 companies, only seven had no direct ties to AI. He noted that at the top of the dot-com bubble in March 2000, just 20 stocks also hit new all-time highs. This narrow concentration in a single sector is a key indicator of potential vulnerability, according to the strategist.

The US stock market saw significant growth in May, driven by bullish sentiment on AI and memory chipmakers. During that month, Micron Technology rose 88 per cent, SK Hynix 81 per cent, AMD 46 per cent, and Samsung 44 per cent. Hartnett acknowledged that speculative price action around AI was likely to continue, but warned that this occurrence is an eerie sign that a dot-com bubble-type crash could be on the horizon.

Other prominent analysts have raised similar concerns. Famed investor Michael Burry recently stated that the market’s heavy dependence on AI feels like "the last months of the 1999–2000 bubble." Paul Tudor Jones also told CNBC in early May that the current AI-fueled market looks similar to the dot-com bubble. CNBC’s Mad Money host Jim Cramer compared current AI funding flows to the late 1990s, noting circular money flows where companies lend to those buying their goods.

BCA Research has also highlighted the narrowness of recent gains. The firm noted that while US and emerging market equity indexes have reached new highs, their advances have been extremely narrow, with poor breadth often signalling underlying vulnerability. Hartnett advised clients to take a defensive position, specifically suggesting long bonds and defensives or sectors that underperformed in the final months of previous bubbles.