The Formation of a "Baby Bubble" in the U.S. Stock Market

BofA Global Research has identified a phenomenon known as the "baby bubble" in the U.S. stock market. This bubble is driven by the dominance of monopolistic tech companies and the growing enthusiasm surrounding artificial intelligence (AI).

BofA's investment strategists caution that the AI bubble is essentially anticipating interest-rate cuts by the Federal Reserve. As inflation rates have significantly decreased from their peak in 2022, many investors are expecting the Fed to lower its benchmark interest rate sometime this year.

However, BofA's strategists argue that in order to burst this bubble, the real rate for the 10-year Treasury note would need to increase from its current 1.75% to 2.5%.

Despite concerns over the baby bubble, the U.S. stock market has been performing well this year. The S&P 500 has been propelled to a series of record highs in January, primarily thanks to the strong performance of technology companies. For example, chip maker Nvidia Corp.'s stock has risen by approximately 23% so far in 2024.

On Thursday, the S&P 500 reached a fresh record high of 4,894.16, marking its longest winning streak since December 14, according to Dow Jones Market Data.

However, on Friday, U.S. stocks experienced a slight dip. The S&P 500 slipped 0.1%, while the Nasdaq Composite fell 0.4%. On the other hand, the Dow Jones Industrial Average gained 0.2% based on preliminary data from FactSet.

Nonetheless, in the bigger picture, the S&P 500 has achieved a 2.5% gain this year after its exceptional 24.2% surge in 2023, largely driven by impressive performances from major tech companies.