The Financial Alliance reported on February 17 (edited by Xiaoxiang) that if you listen closely, amidst the cheers from investors for AI, echoes of some major historical bubbles are beginning to resonate between the skyscrapers of Wall Street — this is the latest warning issued to clients by strategists at Bank of America in a report last week.

The bank stated that as investors continue to flock to invest in growth Stocks, the market has begun to resemble the 'Nifty Fifty' bubble of the 1960s and the 'Internet bubble' of the late 1990s. While US Stocks may still rise in the short term, the outcomes following these renowned bubble periods suggest that trouble may be approaching...

This argument is based on market concentration. The current Market Cap of US Stocks is 3.3 standard deviations higher compared to historical standards in the rest of the world...

In the USA,$S&P 500 Index (.SPX.US)$the five largest Stocks by Market Cap currently account for 26.4% of the total Market Cap of the Index.

Moreover, the Market Cap of 'New Economy' Stocks in the S&P 500 Index also accounts for more than half of the total Market Cap of the index, reaching a historical high. 'New Economy' Stocks refer to those in the Technology, Communications Services, and Consumer Discretionary Sectors.

Bank of America strategist Jared Woodard stated that one reason for the high market concentration is passive investing, where investors indiscriminately allocate funds into indices. He wrote, 'Passive funds dominate with a market share of 54%.'

Woodard warned that 'passive investing often overlooks valuation and fundamentals, which means innovation will provide significant upside potential, but also entails substantial risks during economic downturns.'

These high concentrations may indicate that investors will experience a long period of pain in the future, just as was observed after the 'Fabulous Fifty' and the 'Internet Bubble.'

Woodard mentioned in his report on February 11 that the momentum reversal in the US stock market is becoming exceptionally sharp. The drop of over 50% in 'XINJINGJI' stocks could drag the entire Index down by 40%.

He continued to write that if the eight sectors outside the 'XINJINGJI' favorites rebound by 10%, and a few oversized Technology stocks drop by 10%, then the overall Index can only barely stay flat. This is not very healthy and not very diversified.

The lost decade

Woodard warned that investors will face a difficult period in the next decade, which is consistent with the views of other strategists from major Wall Street banks in recent months.

Morgan Stanley's Chief Investment Officer Mike Wilson stated last December that the ROI of the S&P 500 Index over the next decade will be 'flat,' while Goldman Sachs' Chief US Equity Strategist David Kostin predicted that the average annual ROI for the Index in the next 10 years will only be 3%.

So how can investors avoid a potential bear market and a 'lost decade' in the future? Bank of America has put forward a set of strategies: Woodard stated,

Firstly, investors need to pay attention to when the CSI 500 Equal Weight Index starts to outperform the conventional Market Cap weighted Index. Currently, the Market Cap weighted Index is overbought by 2.5 standard deviations relative to the long-term trend.

Secondly, investors might consider investing in a basket of high-quality Stocks, but with a smaller exposure to the "seven giants" Stocks. The bank stated that some Funds offering quality Stock investments include:$PACER US LARGE CAP CASH COWS GROWTH LEADERS ETF (COWG.US)$；$iShares MSCI USA Quality GARP ETF (GARP.US)$ ; and $WISDOMTREE U.S. QUALITY GROWTH FUND (QGRW.US)$ 。

Thirdly, maintain diversity. Derek Harris, Head of Portfolio Strategy at Bank of America Global Wealth and Investment Management, recommends keeping the weight of each holding in the portfolio below 15%.

Editor/danial