Technology stock concentration is nearing a historical bubble threshold, and a wave of massive IPOs is pushing the market toward even greater risk.
In a recent report, Bank of America strategist Michael Hartnett warned that if super IPOs from companies like SpaceX and OpenAI materialize, the technology sector's weight in major stock benchmarks could easily surpass the approximately 48% concentration level seen during all major historical bubbles. This includes the Roaring Twenties, the Nifty Fifty of the 1970s, Japan's bubble in the 1980s, and the dot-com bubble of the 1990s.
Currently, the technology sector already accounts for over 44% of the S&P 500 index. Hartnett described the current market state as having "strong price action, retail frenzy, low volatility... the scent of a bubble is thick."
This warning comes as market sentiment sits in extremely optimistic territory. According to a Bloomberg report, a Bank of America fund manager survey released earlier this week showed investors increased their stock allocations this month by a record amount. This prompted Hartnett to reiterate his view that the stock market faces a pullback risk. He noted in the report, "Consensus is extremely bullish on both positioning and earnings expectations, and with yields breaking higher, it's time to take some profits."
Super IPOs Intensify Tech Concentration Risk SpaceX, led by Elon Musk, has announced plans for what could be the world's largest IPO. Meanwhile, ChatGPT developer OpenAI is striving to go public before its competitor Anthropic. These mega-listings would further amplify market optimism around technology and artificial intelligence, a sentiment already driving the S&P 500 to its most concentrated rally in decades.
Hartnett points out that if these super IPOs combine with existing AI giants, market concentration could easily exceed the peak 48% level of all known historical bubbles. This creates direct pressure for asset allocators. Constrained by risk management rules, many institutional investors cannot fully replicate this weight in their portfolios, passively accepting the risk of increased tracking error.
Furthermore, the index's excessive tilt toward technology may mask underlying structural weaknesses in the market. The potential softness in sectors more closely tied to the real economy, such as consumer and financial stocks, could be obscured by the strength of tech stocks, distorting overall market risk assessment.
Market Lessons from Historical Mega IPOs Hartnett reviewed several major historical IPO cases, drawing a cautionary conclusion. The listings of Saudi Aramco and Meta (formerly Facebook) proved to have limited impact on the broader market's trajectory in hindsight. However, in some cases with clear "top characteristics," such as Visa and AIA Group, the overall market performance actually declined within 9 to 12 months after their listings.
This historical pattern suggests that super IPOs themselves are not necessarily the direct trigger for a market crash, but they often coincide with market peaks, offering some reference value for timing judgments.
Bond Yields as the Key Variable for Bubble Endings Hartnett clearly states that surging bond yields are the common path for the end of past booms and bubbles. He uses two State Street ETFs as dual indicators to observe the impact of yields on stocks: If a biotech ETF falls to $120, it signals the impact of persistently rising bond yields is materializing. If an ETF tracking retail stocks rises to $85, it indicates the bond market's shock is temporarily delayed.
On the policy front, Hartnett expects no substantial policy tightening until the CPI rises to 4-5% in the coming months. He also notes that market participants are unlikely to easily cut long positions before historic IPOs land. This partly explains the resilience of the current extreme optimism and suggests that potential adjustment risks are accumulating rather than dissipating.
It is worth noting that Hartnett previously accurately predicted the relative strength of international equities last year, and his bullish call on commodities has also materialized. This lends greater market attention to his current warnings.
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