Bank of America strategists are warning of a potential 40% crash in the S&P 500, attributing it to a growth-stock bubble.

What Happened: The bank’s strategists, earlier this week, drew a comparison between the current market scenario and the notorious “Nifty Fifty” and “dot-com” bubbles of the 1960s and late 1990s.

They highlighted the similarities between these periods and the present market, hinting at a possible impending fallout.

As per the report by Insider, the crux of the bank’s argument lies in the market’s concentration levels. The market cap of U.S. stocks is 3.3 standard deviations away from the historical average, when compared to the rest of the world. The top five stocks in the S&P 500 now make up 26.4% of the index.

Jared Woodard of Bank of America cited passive investing as a major factor for this market concentration. “Passive funds dominate with 54% market share,” Woodard stated. He cautioned that ignoring valuations and fundamentals could result in a significant risk during a bust cycle.

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Woodard’s predictions are in line with recent perspectives from strategists at other leading Wall Street banks. Both Mike Wilson of Morgan Stanley and David Kostin of Goldman Sachs have predicted a decade of flat returns for the S&P 500.

Despite the pessimistic forecast, the bank offered a strategy to evade a potential bear market. This involves monitoring the S&P 500 equal-weight index, investing in quality stocks with lesser exposure to the Magnificent Seven stocks, and diversifying holdings.

Why It Matters

Investors and market watchers have been increasingly concerned about the high concentration levels in the S&P 500. The dominance of a few stocks, often referred to as the ‘Magnificent Seven’, has raised questions about the overall health and stability of the market. This warning from Bank of America underscores these concerns and highlights the potential risks associated with a highly concentrated market.

The bank’s comparison of the current market situation with past market bubbles serves as a stark reminder of the potential consequences. The ‘Nifty Fifty’ and ‘dot-com’ bubbles led to significant market corrections and investor losses. The possibility of a similar fallout in the current scenario could have serious implications for investors.

While the bank’s strategy offers a potential way to navigate the situation, it underscores the need for careful investment strategies and risk management in the current market environment.

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