Strategist Michael Hartnett from Bank of America has cautioned that the potential mega-IPOs of companies such as SpaceX and OpenAI could drive the weighting of technology stocks in major market benchmarks to levels exceeding those seen during historical market bubbles.
SpaceX, led by Elon Musk, has outlined plans for what would be the world's largest initial public offering, while ChatGPT developer OpenAI aims to go public ahead of rival Anthropic. These massive stock issuances are expected to fuel the existing optimism surrounding technology and artificial intelligence stocks, which has already powered one of the narrowest market rallies in decades.
Hartnett noted in a report, "Strong price action, retail frenzy, declining volatility... it smells too much like a bubble." He added, "Adding mega-IPOs to the AI giants could easily push market concentration above the levels seen during the Roaring Twenties (around 48%), the 'Nifty Fifty' of the 1970s, Japan in the 1980s, and the tech-media-telecom bubble of the 1990s."
Technology stocks already account for over 44% of the S&P 500 index. A further increase in concentration could exacerbate challenges for asset allocators, as risk management constraints often prevent them from fully replicating these weightings in their portfolios.
A significant skew in equity index weightings toward the surging technology sector also risks masking underlying weaknesses in sectors more directly tied to the economy, such as consumer and financial stocks.
Reflecting on past large IPOs, Hartnett observed that listings like Saudi Aramco and Meta Platforms Inc. have proven inconsequential for the broader stock market. In some instances, such as after "top" issuances from Visa Inc. and AIA, markets declined within 9 to 12 months.
Hartnett suggested that a surge in bond yields could end periods of prosperity and speculative bubbles. He previously correctly predicted that international stocks would outperform last year, and his bullish stance on commodities has also paid off. He pointed to two State Street exchange-traded funds as indicators of how yields impact equities.
A decline in the State Street SPDR S&P Biotech ETF, often viewed as a speculative asset, to $120 would signal a sustained surge in bond yields. Hartnett noted that if the State Street SPDR S&P Retail ETF, which tracks retail stocks, rises to $85, it would indicate a delay in bond-related shocks.
Hartnett indicated that bullish sentiment has reached near-extreme levels, triggering sell signals for stocks. A fund manager survey released by Bank of America earlier this week showed investors increased their equity allocations this month by the largest margin on record, prompting the strategist to reiterate warnings that stocks appear poised for a pullback.
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