Signs of a late-cycle bubble are piling up in the markets and have led Bank of America strategists to draw comparisons to the dotcom boom in 2000 and call 2022 a slightly negative year for stocks. "There are too many similarities between today and 1999/2000 to ignore," strategists led by Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, said in a note. "The shift from 2021 to 2022 can be characterized by a growing acceptance of the unthinkable." The Wall Street firm listed a laundry list of worrying signs in the markets, including negative real interest rates, surging inflation, frenzied IPO activity and liquidity risks in the world's largest asset classes like U.S. Treasurys and China real estate. Bank of America set its 2022 S & P 500 target at 4,600, which represents a 2% decline from Monday's close of 4,682.84. The environment is reminiscent of the market set-up before the burst of the internet bubble in the late 1990s, according to Bank of America. "We began our career in the late 1990s, which felt similar – Fed hike, valuations, IPOs, negative equity risk premia – and was also characterized by an acceptance of the outrageous," Subramanian said. The dotcom bubble formed amid a swift rise in internet stock valuations during the bull market in the late 1990s. Ultimately, stocks entered a bear market after the bubble burst in 2001, while a handful of internet companies went bust in the aftermath. More recently, the stock market rapidly rebounded from the pandemic-induced sell-off in March 2020 on the back of unprecedented fiscal and monetary policy. The S & P 500 is up nearly 25% this year, notching more than 60 record highs in the meantime. The rally has come despite fears of inflation, lingering Covid-19 cases, supply-chain disruptions and the prospects for reversal of ultra-easy monetary policy. The market is faced with a slew of challenges that are arguably worse than the tech bubble in the late 1990s, Bank of America said. First, the Federal Reserve is expected to raise interest rates for the first time post-pandemic in September, and the rate hike will happen in a statistically expensive market, Subramanian said. Second, the market's fixation on growth is more dramatic now than in the 1990s, the bank said. Moreover, more companies with negative earnings have gone public than during the dotcom bubble.
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, October 27, 2021.
Brendan McDermid | Reuters
Signs of a late-cycle bubble are piling up in the markets and have led Bank of America strategists to draw comparisons to the dotcom boom in 2000 and call 2022 a slightly negative year for stocks.