Source: Zhitong Finance
The bank is watching the real yield and credit spreads on 10-year US Treasury bonds to find signs when the AI-led rally will end.
The Bank of America has coined a phrase to describe the current market: “you can buy anything but bonds” (bull market).
Bank of America notes that in the fourth quarter of 2023, stocks and cryptocurrencies are leading the way. In the first quarter of this year, commodities and cryptocurrencies became the darlings of the market. So far, the second quarter has been a time when the US dollar shines brightly.
Although this has brought huge profits to well-positioned traders in various asset classes, Bank of America warns that it is a by-product of huge government spending and may eventually dissipate once several key conditions are met.
Among them, the most critical are large technology companies that have dominated the performance of US stocks for a long time, mainly because they are closely linked to artificial intelligence. Bank of America said that the rise in “you can buy anything but bonds” has particularly fueled the market's enthusiasm for investing in the largest stocks. As shown in the chart below, the top ten stocks account for a record 34% of the market value of the S&P 500 index.
However, Bank of America believes that this booming bull market will not last forever. The bank outlined a situation that could disrupt gains and ultimately weaken the leading position of giant growth stocks: the actual yield on 10-year US Treasury bonds climbed to the 2.5% to 3% region, and the combination of rising yields and widening credit spreads would raise market concerns about a recession.
Currently, the actual yield on 10-year US Treasury bonds is 2.28%, which means that there is still room for further increase in the actual yield before triggering the final sell-off of large stocks with greater weight. As shown in the chart below, since October 2023, this yield indicator has hardly surpassed 2.5%, and if so, it has only caught up for a short time.
Furthermore, another consideration is that mega-capitalization technology stocks are no longer rising like unstoppable boulders. The “Big Seven US Stock Companies”, which focus on artificial intelligence, have shown internal segmentation. Tesla (TSLA.US) and Apple (AAPL.US) did not start well in 2024, while giants such as Nvidia (NVDA.US) and Microsoft (MSFT.US) showed no sign of slowing down. It is worth mentioning that Meta (META.US)'s performance increased by more than 40% this year, but its stock price fell sharply, mainly because its growth rate was not enough to please investors.
According to Bank of America, these differences reduce the risk of concentration and may curb the eventual sell-off. At the same time, keeping an eye on the real yield on 10-year Treasury bonds will help to find signs of when such a recession will arrive.
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