Bank of America strategists said that the US stock market will continue to rely on a few supercap stocks to guide the direction until rising real interest rates raise concerns about a recession.
The team led by Michael Hartnett pointed out that the ten largest US stocks together accounted for a record 34% of the market capitalization of the S&P 500 index, while the ten largest stocks in the world accounted for a record 23% of the MSCI global index.
The strategist wrote in a report that this high level of concentration will continue until the actual 10-year yield rises to around 3%, or that rising yields and widening credit spreads together pose a threat of recession. High yields on inflation-adjusted bonds are seen as meaning that financial conditions are tight, and are also often the cause of the bursting of stock market bubbles.
Despite the turbulent trend in April, the so-called tech giants, including Nvidia, Apple, and Amazon, have maintained a significant lead over other stocks in the market since the beginning of this year.
The strong results announced by Microsoft and Alphabet on Thursday are expected to sustain the gains of large technology stocks.
Bank of America strategists wrote that the market is currently positioned as a “no landing” scenario, where interest rates have been high for a long time but economic growth is still strong, which will benefit risky assets, especially cyclical assets.
However, strategists pointed out that the risk of accelerated inflation is bad for risky assets, will cause market fluctuations, and benefit cash, gold, and commodities.