Bank of America Securities stated that, following a rally led by the technology, artificial intelligence, and communication services sectors, certain U.S. equity sectors have become overvalued, overcrowded, and excessively concentrated in gains. The bank therefore recommends that investors consider locking in profits on some positions, while still maintaining its year-end S&P 500 target of 7,100.
Valuation and increased concentration among market leaders
Bank of America notes that current market pressures stem primarily from high valuations, rising speculative trading, and returns becoming increasingly concentrated among a few large stocks. By valuation, high P/E stocks have continued to significantly outperform low-valuation stocks, with AI, mega-cap tech stocks, and momentum trading serving as key drivers of this trend.
The row also noted that the breadth of the index rally is narrowing, with strength at the index level masking greater divergence among individual stocks. Within the technology sector, the performance gap between the strongest and weakest subsectors has approached levels seen during the 2000 tech bubble.
AI expenses and financing divert liquidity
Bank of America says the market is reassessing the scale of AI-related capital expenditures. According to its estimates, by the end of this year, capital expenditures of hyperscale cloud providers could approach 100% of operating cash flow, compared to about 40% in 2023.
Greater investment in AI infrastructure supports long-term growth but may compress profit margins and free cash flow. Meanwhile, large IPOs, follow-on offerings, and other financing activities could also divert liquidity from the secondary market, particularly when valuations are already elevated.
Intraday volatility has significantly increased.
This alert comes as U.S. equities are experiencing sharp volatility. Reports indicate that the market lost approximately $430 billion in market capitalization within about 90 minutes and as much as $1 trillion within four hours; however, a significant rebound later in the session revealed a rapid shift in investor sentiment.
Market volatility was partly influenced by U.S. President Trump’s remarks regarding a potential ceasefire between Israel and Iran, as well as the possibility of ongoing negotiations between the U.S. and Iran. Among individual stocks, Apple’s shares fell approximately 5% from their intraday high following the release of the new Siri AI, further intensifying market focus on the pace of AI realization.