The S&P 500 closed at a record high on the last trading day of May, but a striking detail beneath the surface of that milestone is raising alarms among veteran strategists: only 20 of the index’s 500 members hit their own all-time highs on the same day.
Of those 20 stocks, just seven had no direct connection to artificial intelligence.
Michael Hartnett, investment strategist at Bank of America, pointed out in a note to clients that the exact same thing happened at the top of the dot-com bubble in March 2000, when just 20 stocks were hitting new highs as the broader index peaked.
Hartnett said the parallel is the latest sign that speculative price action, while likely not finished yet, is approaching its end.
Memory Chips Led a Breathtaking Two-Month Rally
The May stock surge was driven primarily by the semiconductor sector, with memory chip makers in particular posting extraordinary gains.
AMD soared 46% over the month, Micron Technology jumped 88%, Samsung gained 44%, and SK Hynix surged 81%. Several of these companies are now valued at or near a trillion dollars.
The tech-heavy Nasdaq Composite jumped 25% across April and May combined, its best two-month stretch in more than two decades.
The scale of those gains is remarkable on its own, but the concentration of performance within a narrow slice of the market is what is drawing the most scrutiny from analysts tracking the historical parallels.
Breadth Is Weakening Even as Indexes Hit Records
The contradiction at the heart of the current rally is that the major indexes are at all-time highs while a growing proportion of their individual members are quietly declining.
Advance-decline lines, which track how many stocks are rising compared to how many are falling, surged at the end of March and have been trending in a bearish direction since the middle of April, according to technical analyst Ari Wald at Oppenheimer.
Only about 55% of S&P 500 stocks were trading above their 200-day moving average as of May 20, according to BCA Research. That means nearly half of the index’s members are in medium-term downtrends even as the index itself sits at records.
BCA strategists led by Arthur Budaghyan said the narrow advance is a warning sign that should not be dismissed.
“Even though U.S. and emerging market equity indexes have reached new highs, their advances have been extremely narrow. Poor breadth is often a sign of underlying stock market vulnerability,” Budaghyan wrote in a May 20 research report.
Bank of America Issues a Post-Bubble Road Map
Hartnett stopped short of calling the top definitively but told clients to start preparing for the scenario where the bubble ends.
He identified central banks and rising interest rates as the most likely forces that will ultimately break the rally, consistent with the historical pattern in which monetary tightening deflates speculative excess after easy money conditions have driven valuations to extremes.
In his post-bubble road map, Hartnett advised clients to shift toward a defensive posture, recommending long positions in bonds and in sectors that dramatically underperformed during the final months of the bubble.
The guidance mirrors what worked for investors in the aftermath of prior market peaks going back to 1929.
“Post-bubble investor roadmap since 1929 is long bonds, and long combo of defensives and/or sectors which dramatically underperformed in the last months of the bubble,” Hartnett wrote.
What Could Break the Rally
The current market environment shares several features with late-stage bull markets that preceded major corrections.
Valuations measured by the Shiller price-to-earnings ratio are within striking distance of dot-com era peaks. The rally is concentrated in a small number of AI-related names. Bond yields are rising. Inflation is at a three-year high. Consumer sentiment is at record lows.
And the Federal Reserve has shown no indication it will ride to the market’s rescue with rate cuts anytime soon.
The bullish counterargument is that the companies driving the current rally are genuinely profitable and generating real cash flows, unlike many of the dot-com era names that had no earnings at all.
AI infrastructure investment is also producing measurable economic activity rather than just speculation.
Whether those differences are sufficient to justify current valuations, or whether the narrowing of market breadth signals a vulnerability that will eventually assert itself, is the central question investors and strategists are now debating as the market enters what Hartnett and others believe could be the final stage of the cycle.
The post The Stock Market Just Did Something Eerily Similar to the Dot-Com Bubble Top in 2000 appeared first on .
Continue reading...