Bank of America strategists said the current rush into technology stocks is similar to the dot-com bubble in 1999, when investors believed the economy would remain strong even if monetary policy was tight. Michael Hartnett and other Bank of America strategists wrote in a report that the decline in U.S. bond yields in the fourth quarter pushed up the Nasdaq index, but both yields and the Nasdaq index have risen in the past four weeks. This situation usually occurs during recessions, such as 2009 or the dot-com bubble at the turn of the century.
Hartnett noted that investors are not too concerned about whether the Fed will cut interest rates in March or May. Until inflation rises again or unemployment picks up, the market will view the Fed's decisions as positive for asset prices. If unemployment increases, it will greatly change the macro environment and market structure.
The Nasdaq 100 soared 54% last year, driven by hopes of lower interest rates, a stronger economy and optimism about artificial intelligence. This wave of gains has continued into 2024. Investors are still optimistic about technology stocks. The stronger-than-expected performance of Meta and Amazon may bring more momentum to the market.
Fed Chairman Jerome Powell this week played down market expectations for a rate cut in March amid concerns that inflation remains above the Fed's 2% target.
Hartnett noted that 75% of investors expect a soft landing for the U.S. economy, while 20% expect no landing. While a soft landing should support more stocks moving higher, 45% of the S&P 500's gains in January came from the Big Seven.
Hartnett's view on technology stocks is similar to a warning from JPMorgan Chase & Co. strategists earlier this week that the situation in U.S. stocks is increasingly similar to that of the dot-com bubble.
Hartnett said the Bank of America Bull and Bear indicator, which measures investor sentiment, surged to a two-and-a-half-year high, but was still far from a contrarian sell signal.