The stock market is once again showing signs similar to those of 1999.
Bank of America analysts stated that they have identified a "bubble-like" pattern in the stock market, which has also appeared before the bursting of the internet bubble: defensive sectors have experienced explosive rises.
Defensive stocks in sectors such as healthcare and essential consumer goods have recently performed strongly, as investors shift to other safer areas of the market while weighing the risks associated with the artificial intelligence sector. So far, the healthcare, materials, and essential consumer goods sectors have risen by 15%, 14%, and 12% respectively, making them among the best-performing sectors this year.
Another defensive sector, energy, was the best-performing market sector in 2026, but this was mainly due to the Iran war and the historic surge in oil prices. This sector has risen by 52% this year, which is about 20 percentage points higher than the increase in tech stocks.
In the years preceding the arrival of historic market highs, similar dynamics had also occurred. Bank analysts in the United States noted that in January 2000, stocks in the healthcare and materials sectors briefly outperformed the S&P 500 index, followed by a widespread decline in risky assets.
Bank of America analysts stated that a similar pattern had appeared before the stock market crash during the pandemic, and added that the current rise in defensive sectors has pushed the bank's bubble risk indicator to dangerous levels. This indicator is a proprietary tool used by the bank to determine whether there is "bubble-like price behavior" in a particular market sector.
Analysts wrote, "These developments further prove that the market continues to evolve towards a more bubble-like state."
It also noted that as the AI transaction faced selling pressure, yields on U.S. Treasury bonds have recently declined. The drop in yields reflects the market's belief that interest rates will be lowered, indicating that investors may be anticipating a weakening economy, or they may expect that weak performance of the AI transaction will trigger a "growth shock," analysts wrote.
Despite these warning signs, Bank of America indicates that the market seems to be heading towards a "risk-clearing event," and that we are about to see a more "bullish sentiment shift."
The recent trend in the U.S. stock market has been volatile, and as the tension surrounding AI transactions intensifies, concerns about bubbles have once again come to the forefront. Investors are worried about the scale of capital expenditure by large tech companies on AI, and they also fear that AI investments may begin to slow down, which could have a chain reaction on suppliers in that industry.
Other signs similar to those at the peak of the internet bubble are also emerging. This summer, JPMorgan Chase pointed out a divergence between tech hardware stocks and the largest spenders in AI transactions, a pattern that also occurred in 1999.
In July of this year, in a report to customers, Bank of America pointed out that there was a growing divergence between the volatility of individual stocks within the S&P 500 index and the overall market volatility indicator, a situation that had also occurred during the later stages of the internet bubble.
