The stock market's biggest winners may be finished, says BofA — is a bubble coming as investors may shift strategy?
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The days of mega-cap stocks leading the stock market advances may be over, warned Bank of America's head of US equity and quantitative strategy, Savita Subramanian, as per a report. After decades of market leadership by the biggest firms, investors may be on the verge of a dramatic shift that will redefine market leadership and maybe also raise fears of a bubble that could burst soon, according to Yahoo Finance.
Top 50 S&P 500 Stocks Have Outperformed Since 2015
In a client note, Subramanian pointed out that the top 50 stocks in the S&P 500 have surpassed the overall index by 73 percentage points since 2015, as per the report. This type of concentrated market leadership isn't new, such dominance also occurred in the late 1990s, leading to the bursting of the dot-com bubble, as reported by Yahoo Finance.
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A Familiar Pattern From the Dot-Com Era?
After the bust, the market witnessed a large shift from megacap growth, leading to value and small-cap stocks outperforming during the early 2000s, and now Subramanian thinks a similar tide shift might be coming to markets soon, according to the report.
Subramanian said that, "History would suggest there is more to go in cap-weighted dominance," adding, "But if the Fed's next move is a rate cut, and if the Regime indicator is shifting to a Recovery, we think the run may be closer to done," as quoted in the report.
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BofA's 'Regime Indicator' Signals a New Market Phase
Bank of America's "regime indicator" separates market cycles into four stages: Recovery, Mid Cycle, Late Cycle, and Downturn, reported Yahoo Finance. The firm decides based on a variety of factors such as corporate earnings revisions, inflation data, and economic growth projections, according to the Yahoo Finance report.
Currently, the company thinks that the market is moving out of a Downturn stage, when mega-cap stocks tend to perform well, and into a Recovery stage that is good for value and small-cap stocks, as per the report.
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AI Boom Drove Top 20 Stocks to Outperform the S&P 500
This move may mark the end of the technology-driven rally since the start of the current bull market in October 2022, dominated by tech titans as Nvidia, Microsoft, Apple, Amazon, and Alphabet, many of whose recent advances are a result of the AI boom, according to the Yahoo Finance report. The top 20 stocks since the most recent market bottom in April have risen about 40%, better than the broader S&P 500's 28% advance, and the other 480 stocks have typically lagged behind, as reported by Yahoo Finance.
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Small-Cap Stocks Start to Shine as Rotation Begins
However, in recent weeks, there have been some signs of rotation under the surface as the small-cap Russell 2000, which hasn't reached a new high since 2021, has increased nearly 6% in August, outperforming the S&P 500's roughly 3.5% gain over the same time period, as reported by Yahoo Finance.
A Fed Rate Cut Could Spark a Change in Market Leadership
Subramanian highlighted that, "[Federal Reserve] easing has been accompanied by Mega caps lagging more than leading, and higher inflation should support a broadening of the S&P 500 beyond defensives/secular growth," as quoted in the report.
FAQs
Why is Bank of America warning about mega-cap stocks now?
Because they've been dominating for years, and market indicators suggest a shift could be near.
How does a Recovery phase affect investing?
It usually favors smaller, value-oriented stocks over big tech names.
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