The stock market is reliving the dot-com tech bubble as the Magnificent 7 account for 45% of S&P 500 gains to start the year

• BofA's Michael Hartnett says markets are behaving like they have in past bubbles.
• The Magnificent Seven accounted for 45% of January's S&P 500 return.

The continued outperformance of the Magnificent Seven underscores bubble-era behavior in the market similar to what was seen during the tech rally of the late 1990s, Bank of America said in a note on Friday.

While slumping yields pushed up Nasdaq prices during the fourth quarter, the dynamic has changed in the first month of the year, with both yields and stock prices both jumping in the first four weeks of 2024.

That kind of market behavior is observed in periods following recessions or in times of market bubbles similar to the dot-com era, Bank of America analysts led by Michael Hartnett note.

The Magnificent Seven accounted for 45% of January's S&P 500 return, continuing a wild streak of outperformance that carried through all of 2023. Excluding Tesla, which has seen a sharp drop in share price this year, the group has actually accounted for 71% of the gains in the benchmark index.

With a market cap of $12.5 trillion, the group has surpassed the GDP of major global cities like New York, Tokyo, Los Angeles, London, Paris, Seoul, Chicago, San Francisco, and Shanghai, BofA says.

Though it is still possible that the Fed will cut interest rates in March, Hartnett said that markets don't appear overly concerned about Jerome Powell's next move.

He emphasized that the Fed serves as a support for asset prices only if a "big macro & market game-changer" comes along, such as a surge in inflation or a sharp rise in unemployment.

Roughly 75% of investors are penciling in a soft landing, with 20% anticipating no landing, and 5% eyeing a hard landing, BofA notes. A soft landing would be bullish for market "breadth," or the number of stock participating in a rally, while bonds would stand out in a hard landing scenario.

However, the latest price action in the market points to a potential bubble.

The note further suggests that investors looking to navigate the frothiness should keep an eye on a mix of high-growth stocks and distressed assets, which in 1999 were found in emerging markets and in 2024 can be found in either China stocks or small-caps.

Hartnett's view that the market is exhibiting bubble-like characteristics echoes other pros who have warned recently of over-exuberance in the technology sector, including longtime investment strategist Ed Yardeni, and markets veterans Jon Wolfenbarger and Ted Oakley.