Bank of America Hartnett warns: Mega-IPOs could push market concentration into historical bubble territory

According to Bloomberg, US bank strategist Michael Hartnett warns that potential giant IPOs such as SpaceX and OpenAI could further amplify the heat of technology and artificial intelligence trades, pushing the concentration of the US stock market above historical bubble ranges.

SpaceX has proposed the world's largest IPO plan, and OpenAI, the developer of ChatGPT, also hopes to go public before its competitor Anthropic. Hartnett believes that such large equity issuances, if combined with the market value weight of AI industry leaders, could easily exceed a market concentration of about 48%.

“Prices are strong, retail investor frenzy, and volatility is declining... The smell of bubbles is heavy. Market concentration can easily exceed about 48%, surpassing the roaring 20s, the 70s' ‘Nifty Fifty’, the 80s' Japanese bubble, and the 90s' TMT bubble.”

The technology sector currently accounts for over 44% of the S&P 500, and this round of increase is already one of the narrowest rallies in decades. Hartnett reviewed some large IPO cases: the listings of Saudi Aramco and Meta had limited impact on the broader stock market, but after the ‘topping’ issuances of Visa and AIA Group, the market has fallen 9 to 12 months later.

Hartnett said that the bullish sentiment has approached extreme levels and has triggered a sell signal for stocks. A fund manager survey released earlier this week by US bank showed that investors increased their stock allocation by a record amount this month, prompting him to reiterate the warning that stocks may retreat.

“ On positioning and profit expectations, the market consensus is optimistic to the extreme; coupled with the upward breakthrough of the yield, it indicates that there may be some profit-taking here... But no one will reduce long stock positions before historical IPOs and the market top appear. Policy tightening will occur after CPI rises to 4% to 5% in the next few months.”

In Hartnett's framework, upward bond yields are the way the boom and bubble end. He observes how yields are transmitted to stocks with two State Street bank ETFs: if Biotech ETF falls to $120, it means yields continue to soar; if retail stocks ETF rises to $85, it indicates that bond-related shocks are postponed. //