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Volatility in the US How to trade the rise & fall of a potential Tech Bubble “Alexa, has the Tech Bubble started?” Our investment strategists recently warned against the risk of an overshoot in Tech, noting that the longer it takes Central Banks to tighten, the greater the risk of Tech and Growth stocks entering a speculative frenzy. Data on relative performance, valuation, and flows are reminiscent to varying degrees of the early stages of a bubble: - Market cap hegemony: Following the GFC, Tech stocks ousted Financials from their top position in terms of market cap and now account for 23% of the S&P500, the highest %-age from any single sector since the dotcom bubble (Chart 7). ¢ Dazzling growth vs. value outperformance: S&P 500 Growth stocks (SGX) on aggregate cost ~1.4x as much as their Value counterparts (SVX), the largest premium since the dotcom bubble (Chart 8). Notably, the S&P 500 Growth index is dominated by Tech stocks, which account for 36% of its total market cap. - Third longest streak of monthly gains: In May, the Nasdaq 100 recorded its seventh consecutive monthly gain, the longest streak since 2009. Remarkably, the index has managed to establish a longer streak only twice in its history, in 1986 (10 consecutive months) and in 1995 (8 months). The rally in these two episodes ultimately came to an abrupt halt. However, the index would have substantial further upside from current levels if it were to achieve similar gains (Chart 9). ¢ Lofty valuations: The valuation of Tech as measured by price to consensus forward 12M earnings expectations recently hit its highest value since Nov-07 and is exhibiting signs of acceleration (Chart 10}. However, Tech remains far cheaper than its dotcom bubble highs. ¢ — Irrational exuberance: Inflows to Tech funds are rising at their fastest annualized rate (25% of AUM) in 15 years, a sign of renewed exuberance. Chart 7: The last instance where a single sector dominated SPX market Chart 8: Growth has only been relatively more expensive vs. Value cap as the Tech sector does now was the dotcom bubble era during the peak of the dotcom bubble 35% Sector leadership in US equities 1500 18 30% 1250 16 25% 1000 f 14 20% 750 -u 1.2 15% 500 10% 250 Q N = ice) foe) Q N =" ice) foe) Q N + ico} [op] fez) o> [o>] fo>) Q Q Q OQ OQ = = mm = oO oO lop) Lop) Oo OQ Q Q QoQ Q Q Q Q ~~ — bd _ = —N N N N N ™N N N N 0 ® & S$ 56 8 gé& FS BrE Fs Ze mum Tech MO Financials oo a? nn > >i > > = ~~ re) Discretionary (EN Industrials TNS NNN NN Staples GE Energy ems |_argest sector weight in the S&P500 = === Current = 95th %-ile A1/B(RHS) ===—=S8P Value (SVX) (B) ====S&P Growth (SGX) (A) Source: BofA Merrill Lynch Global Research. Monthly data from Jan-1990 to Jun-17. Source: BofA Merrill Lynch Global Research. Daily data from 30-Jun-95 to 5-Jun-17 ; deg oct Bankof America 4 Global Equity Volatility Insights | 06 June 2017 Merrill Lynch HOUSE_OVERSIGHT_023578