Top Wall Street Strategist Warns Of Possible Market Bubble, Points To Tech Concentration In S&P 500 And AI Hype

A prominent Wall Street bear, who has been advocating for a reduced stock position since the beginning of the year, has once again stepped into the fray.

JPMorgan Chase & Co.’s chief market strategist and co-head of global research, Marko Kolanovic, issued a warning in a note released on Monday, stating that the S&P 500’s increasing levels of stock concentration, which have reached 60-year highs, may be suggestive of the emergence of a bubble.

Kolanovic’s finding indicates that just six mega-cap tech companies, including Microsoft Corp. MSFT, Alphabet Inc. GOOG GOOGL, Amazon Inc. AMZN, Meta Platforms Inc. META, NVIDIA Corp. NVDA and Salesforce Inc. CRM, have explained a major amount of the S&P 500’s performance this year, accounting for 51% of its gains. Furthermore, they account for 54% of the Nasdaq 100’s performance and a whopping 63% of the Growth style’s returns.

While acknowledging AI’s potential for growth, Kolanovic warns that the current AI frenzy, fueled by the success of chatbots, could end in disillusionment. The strategist says that these chatbots frequently struggle with basic queries and often deliver incorrect answers to more difficult questions.

It’s A Matter of When, Not If, The Market Will Crash

Potential catalysts for a large stock reversal, according to the market expert, include the delayed effect of aggressive interest rate hikes by central banks around the world, declining consumer savings, and a “deeply troubling” geopolitical environment. While these variables are cause for alarm, Kolanovic admits that predicting the specific time of a market inflection is tricky.

Early warning signs are already arising, as short interest in AI/LLM ETFs and individual stocks has increased significantly despite their outstanding year-to-date performance. Kolanovic observes that significant increases in concentration and narrow market leadership have traditionally been reversed, with the S&P 500 equal-weighted index, as tracked by the Invesco S&P 500 Equal Weight ETF RSP beating the market-cap weighted index, as tracked by the SPDR S&P 500 ETF Trust SPY.

Chart: S&P 500 Market-Cap Weighted vs. S&P 500 Equal Weighted