It has a certain effect, no doubt about it, seeing it US technology stocks continue to break record after record. And many have some legitimate doubts about the fact that artificial intelligence can trigger one speculative bubble in dotcom style as it was in 2000, 2007 and partly also in 2021. Many analysts have been looking for signs that could suggest an excess of valuation. The situation now is very different compared to that bubble, especially because the rise in prices is supported by a solid earnings momentum companies that grow even faster. Let's see what they are positive signs emerged.
The Fang Plus index of the “Magnificent Seven” doubles the S&P500
We start with a fact, the Fang Plus index, which collects the securities that are currently defined as the “Magnificent Seven” namely Apple , Microsoft, Meta-Facebook, Amazon, Alphabet-Google, Nvidia, Tesla, as well as Snowflake, Broadcom and Netflix. Last week was the seventh positive week of the last eight, taking it above the psychological threshold of 11 thousand points for the first time in history. Not only that, but the Fang Plus index has shown since the beginning of the year a + 28,50% growth, more than double the already excellent +13,90% of the S&P500, underlines Websim.
“Microsoft, Nvidia, Google, Amazon.com and Meta Platforms have collectively surged 45% and now represent 25% of S&P500 equity capital,” he says Goldman Sachs which raised its 2024 year-end target for the S&P500 Index. “The factors that determined the rally are the upward revisions of estimates of consensus on to evaluate for 2024 of these same technology companies and the expansion of valuations resulting from increased investor enthusiasm for theartificial intelligence“. The updated target reflects an upside of around 3,1% from the index's last close at 5.431,60, the broker said in a note.
Who is the most capitalized of the kingdom?
Apple, Nvidia and Microsoft alternately compete for supremacy greater capitalisation of the world. Just yesterday it happened to Nvidia which, with a capitalization that reached 3.326 billion dollars in the afternoon, it exceeded for the first time ecosystem (3.321 billion) e Apple (3.277 billion). And analyst Hans Mosesmann of Rosenblatt Securities even predicts, as Bloomberg reports, that the semiconductor giant could reach the peak of 5 trillion in capitalization next year. It had been the headline for the last few days Apple to rise to first place in the ranking of the most capitalized stocks by overtaking ecosystem (which subsequently counter-surpassed Cupertino). In short, a continuous chase and it is probable that the three will continue to overtake and be overwhelmed. To make a comparison: Apple, Nvidia and Microsoft together are worth more than the entire Chinese stock market, the second largest economy in the world. Then, there is Google (with its Alphabet conglomerate), Amazon, Meta. In the USA they are competing for seventh place Berkshire Hathaway (Warren Buffett's safe), Eli Lilly (which is actually a pharmaceutical) e Broadcom (which produces microprocessors).
Bubble or no bubble? Not at the moment, in fact it's a revolution
This market trend has stimulated the debate between investors and analysts: we are in the presence of a new tech bubble like the one seen in 2000, 2007 and partly also in 2021? Listening to the opinions of various analysts, who like doctors look for all the symptoms of an illness, the answer seems to be univocal: at the moment there are no signs of a bubble. Indeed, we are on the threshold of one new industrial revolution from which a very large number of related industries will also benefit. Let's see why.
Prices grew in parallel with company profits
Industry experts have one series of parameters to be observed to understand whether the patient is sick or not. “The first indicator to observe to understand if we are in the presence of a bubble, after all, is to understand if there is a overvaluation, which however is a necessary but not sufficient condition” he says Marco Piersimoni, Co-Head Euro Multi Asset of Pictet Asset Management. In fact, alongside this it is necessary to evaluate whether the future earnings projections are realistic and if investors in the markets become irrational by resorting to an excess of financial leverage and tolerating very high risk levels.
“If we analyze these assumptions in the current market context, we can see how, in the United States, the relationship between price and profits it is close to 21 times, a value that is well above the average of the last ten years,” says Piersimoni. The excess return (ERP) that can be achieved by investing in stocks compared to real 10-year government bonds is at a two-decade low. This means high share valuations, but still at levels that remain lower than those observed in 2000" says Piersimoni. Furthermore, further elements suggest that the current prices are actually supported – for Nasdaq technology stocks – by one earnings growth which goes hand in hand: both, in fact, have recorded an 11-fold increase in the last 20 years. An aspect that has meant that the ratio between price and profits, in reality, has remained substantially stable in the time range analyzed.
The Nvidia case stands out. In the last year the price of his shares has grown three times, but profits have multiplied five times. This resulted in the price to earnings ratio falling, incorporating a 15% de-rating. Therefore, investors are buying Nvidia shares at a cheaper valuation than they could a year ago.
If you also look at the ratings of Oracle infrastructures , a still active company that was able to overcome the dotcom crisis, saw its share price increase fivefold between 1999 and 2000, while profits – despite growing by 60% – did not advance at the same speed , causing the price-to-earnings ratio to triple.
Marketability of assets, money and speculation
He is also convinced that it is not a dotcom style bubble Gabriel Debach, Italian market analyst of the eToro investment platform, 34 million users worldwide, which is based on three vital elements: oxygen, fuel and heat. Oxygen (marketability of assets): Asset marketability is clearly present, with Nvidia being the third largest stock in the S&P 500 and the 'Magnificent 7' accounting for 32% of the index. This high level of marketability is typical of a phase of strong investor interest and participation. Fuel (availability of money and credit): In a bubble, the easy availability of money and credit is crucial. At the moment, this element is not as present as in the years of the dotcom bubble. Interest rates are at their highest in generations, and long-term bond yields are high. This limits debt-fueled speculation, although note the growth in leveraged ETPs on Nvidia, which may indicate some risk appetite.
Heat (investor speculation): Speculation is often fueled by irrational enthusiasm. In the case of Nvidia and AI, there doesn't seem to be too much speculation. Nvidia's forward price-to-earnings (P/E) ratio is around 45x, and investor sentiment is moderate, suggesting there is no asset bubble. However, the growing interest in AI could lead to more speculation in the future.
Then there are further elements that are not in line with what one would expect to see in the presence of a speculative bubble. For example, the net inflows on the stock market they should be at high levels and instead they remain around zero. Not even the traditional ones trust indicators of investors suggests an excess of optimism in the markets: at the moment, there is neither an excess of confidence nor distrust, as well as theallocation of stocks versus bonds it is substantially balanced. Likewise, among companies we do not see an increase in propensity to carry out mergers and acquisitions. This last factor, historically, reaches high levels during bubble periods: to the point that, in correspondence with the Lehman Brothers crisis, the M&A volume had reached a level almost double the average, while today volumes are recorded around average or slightly higher. Finally, the level of household debt Americans, which remains at very low levels in relation to gross domestic product. Likewise, also the level of credit provided is below historical levels and this suggests the absence of excess leverage within the system, they tell Pictet
A broader rally in sight in 2025 thanks to the development of AI
Microsoft, Apple and Nvidia are on course to reach a market capitalization of $4 trillion next year, thanks to growing enthusiasm for the prospects of theartificial intelligence, say analysts at Wedbush. Massive investments by corporations will not only fuel a new “industrial revolution” in the tech sector, according to Wedbush, but will also support a broader rally of the market in 2025. “Simply put, we believe this technology bull market has room to extend also to the rest of software, consumer technology, cybersecurity, semi-finished products and infrastructure in the next 12-18 months” say Wedbush analysts.
The projects of the big names
In particular for ecosystem AI will help the company monetize its “massive” installed enterprise user base in the coming years, according to Wedbush. The company, which previously backed OpenAI, maker of ChatGPT, has outlined plans to bring artificial intelligence to a number of fields in business with its Copilot offering. Despite moving slightly late in the race for artificial intelligence, Apple unveiled a series of improvements based on it, applied to its products at last week's annual developer conference which, according to Wedbush, could trigger a “super cycle” of iPhone sales. Finally, the chips optimized for artificial intelligence Nvidia they are “essentially the new gold or oil in the tech sector” as a growing number of companies embrace the nascent technology.
The rising star: Broadcom, +5% in 25 days
But if Nvidia's rise is well known, now we ask ourselves: who will be next? Many analysts are already pointing the finger: it is Broadcom, which in the last 5 days has gained 25% and now, with a market cap of over 800 billion dollars, is a candidate to enter the prestigious club of "trillion dollar companies". It is one of the longest-standing companies in Silicon Valley, founded in 1961, as HP Asscociates: a branch of Hewlett-Packard dedicated to semiconductors. It changed its name many years later, but has remained one of the leading companies globally in the production of semiconductors and components for network infrastructures, lately very focused on artificial intelligence. Broadcom has two broad categories of “Ai” products: networking products, such as Ethernet-based switching chips, and custom ASIC chips, which cloud companies are using to build their own custom AI accelerators. Mega customers such as Alphabet and Meta Platforms, but also ByteDance (the parent company of Tik Tok) are interested in these products and in fact Broadcom's "networking" section, which includes these two product lines, increased by 44% in last quarter, now representing just over half of the company's revenues from the semiconductor sector, equal to 53%. In addition, the company at the end of last year added the VMware business, a software company purchased for $69 billion. In the second fiscal quarter of 2024, VMware's revenue was $2,7 billion, up from $2,1 billion in the previous quarter. An acceleration of 29% in just one quarter. In recent days Broadcom announced a stock split (10 for 1) which triggered other increases, mostly technical.
