You ever notice how certain financial “gurus” have been calling for the end of days for, well… ever? Robert Kiyosaki, Jim Rickards, Ray Dalio… these guys have been screaming that the dollar is dead, stocks are doomed, and that your only salvation lies in a stockpile of gold and silver.

To be fair, gold is up 10% in just the first two months of the year. But if you listened to these doomsday prophets over the last 15 years, you would have missed out on a 450% gain for your portfolio just by buying and holding the S&P 500. Instead, you’d be sitting in your basement clutching a pile of shiny metal, waiting for the economy to collapse while the rest of us are out here getting rich off Nvidia and Apple.

But let’s not get too comfortable. Bank of America just issued a warning about AI stocks getting a little too bubbly, and honestly, they might have a point. (Although, coming from a bank that’s up to its eyeballs in leverage, that’s a bit like your broke uncle telling you to stop spending so much on coffee.)

BofA’s main concern is that the market is looking a whole lot like the “Nifty Fifty” era of the 60s and the dot-com bubble of the late 90s. Right now, just five stocks make up 26.4% of the entire S&P 500. And over half of the index’s total market cap is tied up in so-called "new economy" stocks… aka AI and any company that claims to be a tech stock. That level of concentration is wild by historical standards.

(Source: Bank of America)

And let’s not forget passive investing. BofA points out that passive funds now make up 54% of the market, meaning a whole lot of people are blindly throwing money into indexes without caring about valuations or fundamentals. When times are good, that’s fine. But if these tech giants ever take a hit, the entire market could feel the pain.

According to BofA strategist Jared Woodard, we’re looking at a potential 50%+ drawdown in AI-related stocks. If that happens, the S&P 500 could plunge 40%. And if you thought 2022’s tech 20% bloodbath was bad, just imagine what happens when the bubble really pops. (No, not you, Kiyosaki, go back to hoarding silver.)

The AI hype train is moving at breakneck speed, but here’s the thing… while the internet bubble of the early 2000s was backed by massive revenue growth (think billions in PC sales and internet service subscriptions), AI is… not there yet.

Right now, AI companies are burning through cash like a 19-year-old with their first credit card. OpenAI, the poster child for generative AI, is on track to lose $5 billion this year while generating just $3.7 billion in revenue. Yet, somehow, it was recently valued at $157 billion. Does that make sense? Not really. But we’re in a market where hype is king.

Sequoia Capital estimates that AI needs to generate $600 billion in annual revenue to justify current investments. Right now, it’s nowhere close. For comparison, in 2000, the internet was generating $1.5 trillion in today’s dollars… and that bubble still burst. (Read that again).

First off, don’t panic and sell everything. I’m not saying I believe a 40% crash is imminent, but history suggests things could get rocky. If you’re heavily exposed to AI and tech stocks, now might be a good time to diversify. BofA suggests looking into quality stocks with less exposure to the Magnificent Seven to at least diversify your portfolio. (Personally, I’m a big fan of companies that have been around for centuries and have solid cash flow).

Also, keep an eye on the S&P 500 equal-weight index versus the cap-weighted index. If the equal-weighted starts outperforming, that’s often a sign that the market is rotating away from mega-cap tech stocks.

Look, AI isn’t going anywhere. It will continue to disrupt industries. But just because AI stocks have been on a tear doesn’t mean they’re invincible. We’ve seen this movie before: huge run-ups, sky-high valuations, and then… splat.

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Stock.News has positions in Apple.