The stock market increasingly risks failure as tech stocks soar in the 'biggest speculative orgy' in over 4 decades, market vet says

• The stock market is poised for a major retreat as investor sentiment goes to extremes, market veteran Bill Smead warned.
• The S&P 500 "looks like an over-cooked goose" because it's overloaded with stocks that don't offer favorable long-term returns.
• Tech stocks could be in their biggest speculative bubble in over 40 years, he said in a note.

The stock market could be facing the biggest risk of "failure" in decades, as investors grow excessively bullish on hyped-up tech stocks, according to market veteran Bill Smead.

In a note Tuesday, the chief investment officer of Smead Capital Management pointed to the extremely narrow breadth of winners in the S&P 500.

The so-called Magnificent Seven – a group of mega-cap tech firms that have soared this year amid Wall Street's excitement for AI – account for most of the S&P 500's gains this year, while the rest of the index has remained relatively flat. 

"In conclusion, this appears to be one of those times when extremes of bullish sentiment and participation in the most aggressive and popular securities could lead to stock market failure," Smead warned. "Also, it means the S&P 500 Index looks like an over-cooked goose because it is massively overloaded with stocks that don't offer favorable long-term returns." 

He also highlighted Bloomberg data that showed tech stocks appear to be enjoying their best year since the early 2000s, when comparing the price of the Nasdaq 100 over the Russell 2000.

Meanwhile, the price of tech stocks compared to the S&P 500 just notched an all-time high, surpassing the dot-com peak, according to Bank of America.

"The current mania for Artificial Intelligence stocks looks to us like the extension of the innovation mania that peaked in 2021," Smead said. "Tech stocks are in the late stages of the biggest speculative orgy I have seen in 43 years of stock market participation."

Other commentators on Wall Street have warned of a potential bubble forming in AI, which could soon start to unravel.

According to Richard Bernstein Advisors, the current market is so lopsided there's a once-in-a-generation investment opportunity in virtually everything other than the Magnificent Seven stocks.

The Magnificent Seven also just flashed a double-top formation — a technical indicator that suggests a "meaningful reappraisal" of stock prices could be underway, a Crescat Capital strategist recently warned.

Bets on a stock market crash have also grown among experienced investors. In September, 61% of institutional investors said US stocks have a more than 10% chance of crashing, according to the Yale's School of Management US Crash Confidence Index. That's up from in June, when 56% of investors felt that way.