The S&P 500 keeps printing record highs, yet Bank of America chief investment strategist Michael Hartnett has warned investors that a pattern last seen in March 2000, before the dot-com bubble burst, is unfolding right now.

The pattern is breadth.

Just 21 stocks — about 4% of the index — are currently making new highs. At the dot-com top in March 2000, the number was 20, Hartnett revealed in his latest Flow Show note published Friday.

The comparison is striking.

While the S&P 500 — as tracked by the SPDR S&P 500 ETF Trust (SPY) — continues to notch fresh records, only a tiny fraction of its constituents are participating.

The S&P 500 Is at Records: Why BofA Sees Bubble Risks Rising

According to BofA data, 222 stocks in the index are currently trading more than 20% below their highs, while 109 stocks remain down more than 40% from their peaks.

Hartnett's concern is not necessarily that a crash is imminent, but that the current rally has become dangerously concentrated.

The strategist highlighted classic bubble characteristics already visible in today's market: exponential price action, subdued volatility, elevated valuations and extreme concentration.

He noted that the S&P 500 currently trades at roughly 29 times trailing earnings and that the Nasdaq 100 has already rallied more than 80% from its April 2025 lows.

The AI trade has become the dominant force behind market leadership, with a small group of mega-cap technology companies accounting for a disproportionate share of gains.

For Hartnett, that concentration resembles previous market peaks: 1929, Japan's 1989 bubble, and the Nasdaq's March 2000 top.

A Sell Signal Most Investors Are Ignoring

Hartnett also raised Bank of America's closely watched Bull & Bear Indicator to 8.5 from 8.0, pushing it further into what the bank defines as a contrarian "sell signal" territory.

The indicator tracks investor positioning and sentiment across flows, breadth, and credit, and readings above 8 indicate dangerous crowding.

There have been 17 such signals since 2002. Global stocks lost 2%–3% over the following two to three months on average, with drawdowns reaching 15%–20%.

The crowding shows up elsewhere, too.

Bank of America's private clients now hold a record 66% of assets in stocks and the lowest cash level on record.

Despite the warning signs, Hartnett indicates that easy monetary conditions continue to support risk assets.

"Global rate cuts (31) still outpacing hikes (12)," he wrote, adding that traders remain willing to "front-run bubble" conditions until tighter financial conditions eventually emerge.

What to Trade After a Bubble Bursts

Hartnett has already written the next chapter following a hypothetical AI bubble burst, and it leans on a century of market tops.

"Post-bubble investor roadmap since 1929 is long bonds, and 'long humiliation, short hubris' in equities," Hartnett said.

The bond leg is mechanical.

Ten-year Treasury yields have fallen roughly 45 basis points in the six months after every major equity peak since the Roaring Twenties.

The equity leg is the contrarian one.

Within equities, he recommends what he calls the "long humiliation, short hubris" strategy. It means buying the defensive sectors crushed during the mania and fading the leaders that carried it.

The template is 2000.

After the Nasdaq cracked and fell 60% over the next year, utilities — tracked via the Utilities Select Sector SPDR Fund (XLU) — rose 25%. Consumer staples — tracked by the Consumer Staples Select Sector SPDR Fund (XLP) — gained 24%.

Today, staples, financials and healthcare are the worst performers as the Nasdaq doubled off its spring lows. Hartnett expects them to lead next, alongside oil-sensitive consumer stocks and small-cap growth. He also expects AI leadership to evolve.

Rather than the current winners — semiconductor manufacturers and infrastructure builders — future gains could come from companies that adopt and monetize AI technology.

His preferred expression of that shift is through small-cap technology and growth stocks, drawing parallels with the powerful outperformance of small-cap growth following the collapse of the Nifty Fifty era in the 1970s.

"Best performers next 12 months likely to be unlevered, opportunistic, 'diamonds-in-the-rough,'" Hartnett said.