The semiconductor rally has soared past previous peaks witnessed during the dot-com bubble era, as Bank of America's chief investment strategist Michael Hartnett observed in his latest report, 'The Flow Show.'
The PHLX Semiconductor Sector Index (NASDAQ: SOX), which monitors the performance of the 30 largest U.S. semiconductor companies, is presently scaling new heights, exhibiting an impressive 150% surge since the commencement of the bull market in October 2022.
Of even greater significance is the fact that the ratio between the semiconductor market gauge, as tracked by the iShares Semiconductor ETF (NYSE: SOXX) and the S&P 500 has now exceeded the levels observed in March 2000, the pinnacle of the dot-com bubble.
"Abnormal times," the expert commented after noting that the 25% stock market surge recorded over the past five months has only occurred on 10 occasions since the 1930s.
"Normally, such surges originate from recession lows or signify the onset of bubbles," Hartnett remarked.
The expert emphasized that the semiconductor gauge is trading 36% above its 200-day moving average, a level that may raise some concerns about the extent of the rally.
Moreover, the so-called Magnificent Seven now represent 30% of the total U.S. market capitalization.
According to Hartnett, the Federal Reserve always plays a crucial role in driving the stock market. "The Fed causes bubbles and the Fed pops bubbles, and in 2024, the Fed's determination to cut rates means 'we're not too far from it...,'" he suggested.
The analyst recommended investors adopt a stance of "cynical bullishness," maintaining long positions in the stock market until the day preceding the Fed's rate cuts, holding out until extreme euphoria manifests - a scenario likely indicated by the S&P 500 trading at 25 times its forward earnings (currently at 23 times).