AI ‘baby bubble’ in stocks? BofA says higher real rates are needed to pop it. - MarketWatchMarketWatch Site Logo

A “baby bubble” is forming in the U.S. stock market, fueled by “monopolistic tech” and investor enthusiasm around artificial intelligence, according to BofA Global Research.

The AI bubble is “front running” interest-rate cuts by the Federal Reserve, investment strategists at BofA warned in a research note dated Jan. 25. Many investors expect that the Fed may start to lower its benchmark rate this year, as inflation has eased significantly from its 2022 peak.

But the real rate for the 10-year Treasury note would need to rise back to 2.5%, from a current 1.75%, to pop the bubble, the strategists said.

The U.S. stock market is up this year, with shares of technology companies fueling the S&P 500’s rise to a series of record highs in January. Chip maker Nvidia Corp.’s stock NVDA, +2.50% has skyrocketed around 23% so far in 2024, FactSet data show, at last check.

Meanwhile, the S&P 500 finished Thursday at a fresh record high of 4,894.16, advancing for a sixth straight day to mark its longest winning streak since Dec. 14, according to Dow Jones Market Data.

U.S. stocks finished mostly lower on Friday, with the S&P 500 SPX slipping 0.1%, the Nasdaq Composite COMP falling 0.4% and the Dow Jones Industrial Average DJIA gaining 0.2%, preliminary data from FactSet show.

Still, the S&P 500 has climbed 2.5% so far this year, after surging 24.2% in 2023 on the back of massive gains by big tech companies.

Christine Idzelis is a markets reporter at MarketWatch and is based in New York.

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