BofA's Michael Hartnett flags narrow market breadth as warning sign; only 20 S&P 500 stocks hit all-time highs in May; analyst recommends shifting to long-term bonds and defensive stocks ahead of potential bubble burst

A trader looks at a tablet on the floor of the New York Stock Exchange on Monday. [AP]
A trader looks at a tablet on the floor of the New York Stock Exchange on Monday. [AP]

The current boom in the U.S. stock market looks "eerily similar" to the peak of the dot-com bubble in 2000, CNBC reported Monday.

The warning stems from a striking data point: on May 29, the day the S&P 500 set an all-time high, only 20 of its constituent stocks also hit record highs. Of those, just seven had no direct connection to AI.

Michael Hartnett, a prominent Wall Street strategist at Bank of America, said in a recent note that when the dot-com bubble peaked in March 2000, only 20 stocks were likewise hitting new highs, according to CNBC.

Hartnett said "speculative price action" had likely not yet run its course, but the concentration of gains in a handful of stocks was a signal that the bubble was nearing its end.

He added that monetary tightening by central banks and benchmark interest rate hikes would ultimately bring the bubble to a close, presenting investors with a "post-bubble" roadmap.

"The investor roadmap after every bubble burst since 1929 has been long-duration bonds, and/or a portfolio of defensive stocks and sectors that badly underperformed in the final months of the bubble," Hartnett said, recommending that investors begin shifting toward a defensive strategy before long.

The May rally was driven largely by AI semiconductor stocks, led by Micron and AMD. Micron surged 88 percent in May from the prior month, while AMD rose 46 percent.

Over the same period, Samsung Electronics gained 44 percent and SK Hynix climbed 81 percent.

The tech-heavy Nasdaq surged 25 percent over April and May combined, its steepest two-month advance in 20 years.

Market analysts have warned that if the rally fails to broaden to other stocks, it will ultimately reverse into a downturn.

The advance-decline line — which measures the difference between the number of rising and falling stocks — spiked at the end of March but has been declining since mid-April, a sign of a weakening market.

Ari Wald, a technology analyst at Oppenheimer, said in a May 23 report that "internal market indicators have been lagging since the sharp rally in early April."

According to a May 23 report by BCA Research, only about 55 percent of S&P 500 stocks were trading above their 200-day moving average as of May 20.

BCA Research strategists said that while U.S. and emerging-market indexes had hit all-time highs, "the advance is being driven by an extremely small number of stocks," adding that "such narrow market breadth is often a signal of underlying vulnerability in the broader equity market."


jshan@heraldcorp.com