It’s all about the “Magnificent 7” and market concentration.

Bubble talk abounds and the prospect of higher rates in perpetuity amid sticky inflation and hot nominal growth poses a risk to valuations. And yet, high-quality, large-cap growth shares might’ve succeeded in decoupling from bond yields. And then there’s the promise of AI — whatever that promise is. You know the debate(s).

You probably also know there’s no more crowded trade than America’s mega-caps. If you needed confirmation, the February installment of BofA’s Global Fund Manager Survey (the most bullish vintage in two years) showed investors overwhelmingly see “Long Magnificent 7” as the most crowded trade on Earth.

As the chart shows, the Magnificent 7 has now relegated all other crowded trades to also-ran status, claiming 61% of the vote.

Not surprisingly, a plurality of investors polled by BofA this month said large-cap growth shares are likely to be the leadership of the new US equity bull market.

As the bank’s Michael Hartnett noted, the Magnificent 7’s share of the most crowded trade vote was the most since “Long USD” in October of 2022.

If you’re old enough to remember 2022, you might recall the circumstances surrounding the crowded dollar trade: The Fed, having witnessed an unwelcome equity melt-up that July, was forced to disabuse markets of the notion that the hiking cycle would be a short-lived affair. Jerome Powell’s terse address at Jackson Hole catalyzed a destabilizing bout of dollar strength that nearly broke the yen, the yuan, the euro and, with a little help from Liz Truss, sterling.

By late September of 2022, the situation was wholly untenable. Dollar strength was a veritable “wrecking ball,” to employ the popular characterization. Hence “long USD” as the most crowded trade in the world at the time, and with a share of the BofA FMS vote that counted among the largest in the history of the poll (figure above).

Who remembers what happened next? Well, I’ll tell you: A “cool” October CPI report, delivered on November 10, 2022, torpedoed the dollar, sending the greenback careening to one of its worst months ever.

The 5% decline helped ease financial conditions and generally took some of the stress out of markets.

BofA’s Hartnett remembers that episode. He called it a “big inflection point” on Tuesday, while editorializing around the new “most crowded” trades list.

Could something similar happen to today’s most crowded trade — i.e., the Magnificent 7? Maybe. Particularly if the macro data were to underscore the message from Tuesday’s US CPI report, which suggested that to the extent tech multiples have priced in imminent Fed easing, a de-rating’s in order.

Writing earlier this week, SocGen’s Andrew Lapthorne noted that when it comes to dot-com era comparisons, the 10 largest companies in the S&P today represent 54% of the market cap of the other 490 companies. In 2000, that figure was much lower, at 38%, he said.