The US stock market’s tech-driven surge risks a bubble. Experts warn of flat returns, urging diversification and risk management.

The US stock market has long been the world’s dominant financial powerhouse, consistently outperforming global peers. Over the past decade, this dominance has intensified, fueled largely by the explosive growth of technology stocks, particularly those tied to artificial intelligence (AI). However, recent warnings from major financial institutions, including Bank of America, suggest that US growth stocks may be in bubble territory, drawing parallels to historical boom-and-bust cycles like the “Nifty Fifty” era of the 1960s and the dot-com bubble of the late 1990s.

The Concentration Problem: A Market on the Edge?

One of the key indicators that Bank of America (BofA) strategists highlight is the extreme concentration of market value in a handful of stocks. As of early 2025, the five largest companies in the S&P 500—Apple, Microsoft, Nvidia, Amazon, and Alphabet—account for 26.4% of the index’s total value. Additionally, “new economy” stocks, which include AI-driven and tech-focused firms, now make up more than half of the entire index. This level of concentration is historically unprecedented.
BofA’s analysis shows that the market capitalization of US stocks relative to the rest of the world is now 3.3 standard deviations above historical norms—a rare statistical anomaly that suggests excessive valuation. Historically, such extreme deviations have preceded major corrections, as seen during the dot-com crash of 2000 and the financial crisis of 2008.
Passive investing has played a significant role in this imbalance. Index funds and exchange-traded funds (ETFs) have led to indiscriminate capital allocation, where investors pour money into stocks simply because they are included in major indices, rather than evaluating their underlying fundamentals. Currently, passive investment funds dominate the market, holding a 54% market share, further amplifying the concentration of wealth in a few high-growth companies.

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Lessons from the Past: Echoes of the Nifty Fifty and Dot-Com Bubbles

Historically, market bubbles form when a small group of stocks becomes overvalued based on extreme optimism, followed by a dramatic crash when reality sets in.
In the 1960s and early 1970s, the Nifty Fifty—a group of high-growth blue-chip stocks, including IBM, Coca-Cola, and McDonald’s—dominated investor portfolios. These stocks were considered “buy and hold forever” investments, with valuations climbing to unsustainable levels. Eventually, a market correction led to steep losses, with many of these stocks taking decades to recover.
A more striking comparison is the dot-com bubble of the late 1990s. During that period, investors irrationally chased internet stocks, believing the sector’s growth was limitless. Companies like Pets.com and Webvan saw their valuations skyrocket despite weak earnings, and when the bubble burst in 2000, the Nasdaq lost 78% of its value in just two years.
BofA’s recent report suggests that the current market conditions bear a strong resemblance to these past bubbles. Momentum reversals have become sharper, indicating increased market fragility. A 50% drawdown in “new economy” stocks—less severe than the dot-com crash—could drag the entire S&P 500 down by 40%.

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Are Growth Stocks Overvalued? The Valuation Dilemma

Skeptics argue that many major tech companies are “ridiculously overvalued” based on traditional valuation metrics.
One key indicator is the Cyclically Adjusted Price-to-Earnings (CAPE) ratio, which smooths earnings over a 10-year period to account for business cycles. The S&P 500’s CAPE ratio has climbed to levels last seen during the dot-com bubble, suggesting that stocks are extremely expensive relative to historical norms.
Another sign of potential trouble is earnings sustainability. Nvidia, a major beneficiary of the AI boom, saw its stock price surge over 240% in 2023 due to skyrocketing demand for AI chips. However, competition from international players, particularly Chinese firms, could drive prices and margins lower in the coming years. If AI advancements require less computational power than initially expected, the profitability of AI-driven companies could decline, leading to a valuation reset.

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Wall Street’s Warning: A Decade of Subpar Returns?

Wall Street’s cautionary stance on the US stock market’s future is not an isolated opinion, as several major strategists have issued similar warnings about the long-term outlook for equities.
Morgan Stanley’s Mike Wilson has predicted that the S&P 500 is entering a decade of “flat-ish” returns, suggesting that annual gains could be minimal compared to the strong bull run of the 2010s.
Similarly, Goldman Sachs’ David Kostin projects that the index will return just 3% per year on average over the next decade, a significant slowdown from past performance.
Adding to these concerns, Bank of America’s Jared Woodard warns that if the tech sector underperforms while other industries experience moderate growth of around 10%, the market overall could remain flat, underscoring the risks associated with excessive concentration in a handful of high-growth stocks.

How Can Investors Avoid a Potential Drawdown?

Despite the risks, there are strategies investors can adopt to safeguard their portfolios from potential losses.

1. Watch for a Shift in Market Leadership
Historically, the equal-weighted S&P 500 index—which treats all stocks equally rather than giving more weight to the biggest companies—has outperformed the market-cap-weighted index by an average of 1 percentage point per year since 1958. However, there have been five periods when the cap-weighted index outperformed, each lasting around 16 quarters. The current cycle, which began in 2020, is now stretched beyond historical norms, suggesting that smaller companies could soon regain market leadership.

2. Diversify Beyond the Magnificent Seven
Investors should consider reducing exposure to over-concentrated tech stocks and instead focus on “quality stocks” that have strong fundamentals, lower debt, and stable earnings growth. BofA recommends ETFs such as, Pacer US Large Cap Cash Cows Growth Leaders ETF (COWG), iShares MSCI USA Quality GARP ETF (GARP) and WisdomTree US Quality Growth Fund (QGRW).

3. Limit Portfolio Concentration
Derek Harris, BofA’s head of global wealth management, advises that investors should keep each holding under a 15% weighting to avoid excessive risk exposure to any single stock or sector.

Is a Crash Inevitable?

While the warning signs are clear, some investors argue that today’s market is fundamentally different from past bubbles. Unlike the dot-com era, today’s tech giants are highly profitable, have dominant market positions, and benefit from strong global demand. AI-driven productivity gains could justify higher valuations, leading to continued growth.
However, if expectations surrounding AI are overly optimistic, or if the Federal Reserve maintains a tight monetary policy, then a correction could be both deep and prolonged. Investors should remain vigilant and avoid placing all their bets on a handful of high-growth stocks.

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Conclusion

The US stock market has been on an unprecedented bull run, but the concentration of capital in a small number of growth stocks raises significant risks. Historical precedents, extreme valuations, and expert warnings suggest that investors should proceed with caution.
While the AI revolution may drive long-term economic transformation, history has shown that no market boom lasts forever. For investors, the key takeaway is diversification and risk management—ensuring that when the next downturn comes, their portfolios remain resilient.