Bank of America said it spotted another sign of bubble-like behavior in markets.
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Bank of America is flagging a new bubble warning in markets: a sharp rally in defensive stocks.
Defensives have been among the market’s best-performing sectors in 2026.
Those sectors outperformed the S&P 500 leading up to the dot-com crash in early 2000.
The stock market is flashing another parallel to 1999.
Analysts at Bank of America said they spotted a “bubble-like” pattern in stocks that also appeared leading up to the burst of the dot-com bubble: an explosive rally in defensive sectors.
Defensive stocks in areas like healthcare and consumer staples have been on a tear lately as investors weigh the risks associated with the AI sector and flock towards other areas of the market for safety. Healthcare , materials , and consumer staples have been among the market’s best-performing areas so far this year, up 15%, 14%, and 12%, respectively.
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Energy, another defensive sector, has been the market’s top performer in 2026, but mostly due to the Iran war and a historic surge in oil prices. That corner of the stock market is up 52%, outpacing gains in tech by about 20 percentage points.
That dynamic has been repeated in the years leading up to historic market peaks. In January 2000, healthcare and materials stocks briefly outperformed the S&P 500 before risk assets began to plunge across the board.
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The same pattern also appeared prior to the pandemic stock crash, BofA analysts said, adding that the current rally in defensives had pushed the bank’s Bubble Risk Indicator, a proprietary gauge that suggests when an area of the market is exhibiting “bubble-like price action,” towards risky levels.
“These dynamics provide further evidence that markets continue to move toward a more bubble-like state,” analysts wrote.
The bank also highlighted how Treasury yields have fallen recently amid a sell-off in the AI trade . The drop reflects the market’s view that interest rates will be taken lower, which indicates that investors may be anticipating economic weakness or a “growth shock” stemming from weakness in the AI trade, analysts wrote.
Despite the warning signs, the bank said the market appears to be moving toward a “clearing event for risk” and was on the verge of seeing a more “bullish shift in sentiment.”
US stocks have been on rocky footing lately, with worries about a bubble coming back to the forefront amid jitters in the AI trade . Investors are concerned about the amount Big Tech firms are spending on AI capex, but are simultaneously worried that AI investment could start to slow down, which could trigger a chain of downstream consequences for suppliers in the industry.
Other parallels to the dot-com peak are appearing. In a note this summer, JPMorgan flagged a divergence between tech hardware stocks and the biggest spenders within the AI trade, a pattern that also flashed in 1999.
In July, Bank of America flagged a growing divergence between single-stock volatility in the S&P 500 and the market’s broader volatility gauge, which was also seen in the late stages of the dot-com bubble , it wrote in a note to clients.
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