Bank of America strategists say the tech rally driving the Nasdaq 100 and S&P 500 to records carries bubble-like risk, but they are not telling clients to step aside. Instead, the bank recommends capped-risk options trades that let investors stay exposed to AI megacaps while limiting potential losses if the rally reverses.
Bank of America has a message for investors nervous about the tech megacaps pushing the Nasdaq 100 to record highs: stay in the trade, but structure a way out in advance. The bank's strategists argue that equity derivatives let investors capture further gains while limiting the damage if the rally turns out to be a bubble.
A bubble warning, narrower than 2000
BofA analysts, with work on the theme led by Michael Hartnett, compare today's AI-driven market to the 2000 dot-com bubble. The bank's Bubble Risk Indicator (BRI) for the Nasdaq 100 and broader tech sector has climbed to a range of 0.72 to 0.8, a zone the analysts say resembles conditions roughly six months before the March 2000 dot-com peak.
There is an important difference, though. Only 18 stocks in the S&P 500 scored above the 0.8 BRI threshold, together representing just 3.2% of the index weight. At the height of the dot-com boom, somewhere between 50 and 100 stocks cleared that bar.
Single-stock volatility is flashing late-1990s signals
VIXEQ, a gauge tied to single-stock volatility, is up 46% year to date, while the VIX, Wall Street's broader fear index tied to the S&P 500, has risen 13% over the same stretch. BofA says this divergence echoes the late 1990s, when single names swung sharply even as headline indexes kept climbing. The analysts also flagged the effect of high interest rates: tech and AI-linked assets have kept rising while other sectors lagged significantly.
AI-related capital expenditure by US hyperscalers is forecast at approximately $795 billion for 2026, rising to about $1.08 trillion in 2027.
Call spreads over concentrated bets
Rather than buying megacaps outright, BofA's strategists suggest limited-risk derivatives, particularly call spreads. An investor buys a call option that pays off if a stock or index rises above a set price, then sells another call at a higher price to help pay for the first — capping the potential gain.
If the rally continues, the investor profits up to a ceiling; if the bubble pops, the most they lose is what they paid for the trade. According to the research, these trades could be structured on Nasdaq 100 exposure or semiconductor sector ETFs, the corner of the market most directly tied to AI spending.
Capped upside means giving up some gains if the rally turns into a full melt-up, and options carry their own timing risk: a position can expire worthless if the market stalls even if the long-term thesis proves right. If the number of stocks above the 0.8 BRI threshold begins expanding toward the 50-to-100 range seen at the dot-com peak, that would signal the euphoria is spreading beyond the AI leaders.
Source: Crypto Briefing
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