Bank of America flags tech bubble risk but tells clients not to sit out the rally

• ## Technical Highlights

The Bank of America's Bubble Risk Indicator (BRI) for the Nasdaq 100 has climbed to a range of 0.72 to 0.8, indicating building conditions that tend to precede corrections. The analysts also note the divergence between single-name volatility (VIXEQ) and headline indexes (VIX), similar to the late 1990s.

• ## Market Outlook

BofA suggests limited-risk derivatives, such as call spreads, to capture the rally while sidestepping the damage if it turns out to be a bubble. These trades work like a capped bet, with a known, limited cost and a potential gain up to a ceiling.

• ## The Bottom Line

The bank's strategists emphasize that investors should not sit out the rally, but with caution, as the risk of a bubble is higher than in 2000 due to a smaller number of stocks above the BRI threshold. The projected climb in AI-related capital expenditures by US hyperscalers supports the rally, but any sign of a pullback would hit the stocks driving the Nasdaq 100.