Is the Magnificent Seven's record-breaking rise a bubble?

Markets cheerleading around artificial intelligence technologies may be a new phenomenon. However, according to YahooFinance, investors flocking to high-flying tech stocks has been witnessed in stock markets before. The article warns investors to 'Be careful'.

The astonishing rise of the 'Magnificent Seven' in the American stock markets is reminiscent of market bubbles of the past. Analysts say that as stock prices rise, the likelihood of strong returns declines and the risks for late investors grow. Investors are reminded of the collapse of Pets.com and Webvan during the bursting of the dot-com bubble in the late nineties.

Nicole Tanenbaum, partner and chief investment strategist at Chequers, an investment advisory firm, highlighted the market atmosphere before the dot-com bubble: In the early 2000s, the US Federal Reserve (FED) was also pursuing tightening policies, real yields were rising, and central bankers were finally beginning to aggressively loosen monetary policy. But the Fed's rate cuts failed to calm the jittery stock market. Translated with www.DeepL.com/Translator (free version)

The divergence between the largest tech stocks on Wall Street and the rest of the S&P 500 Index continued to grow despite inflated valuations in tech stocks during the dot-com bubble.

The so-called 'Magnificent Seven', coined by Bank of America Analyst Michael Hartnett, refers to the shares of Apple, Alphabet, Microsoft, Amazon, Meta, Tesla and Nvidia. These giant technology companies, which thrive on hardware, software, artificial intelligence and cloud computing, are highly sought after by investors. They are seen as powerful engines of new technologies that are powering the economy and embedding themselves in the lives of billions of people.

Together, the Magnificent Seven have soared 80% this year. According to an analysis by Torsten Slok, chief economist at Apollo Global Management, when these stocks are excluded from the S&P 500, the rest of the index is flat. Slok says Wall Street valuations are starting to resemble those of the tech bubble of 2000 and criticizes Wall Street investors' excitement around the growth of the Magnificent Seven. "Artificial intelligence is the latest new shiny toy," the chief economist said of the AI technologies that have shaken markets this year. The seven companies have an average P/E ratio above 50. During the dot-com crash, the average P/E ratio of market leaders was 63.

The wave of cost-cutting around the potential of AI and the excitement around the transformative effects of the technology has been reflected in stock valuations, and AI stocks have risen like a bubble. Big-cap tech stocks are trading at a significant premium to the rest of the market. But the Magnificent Seven's outsized role on Wall Street brings with it the potential for a serious crash.

George Schultze, founder and managing member of wealth management firm Schultze, said: "These seven companies have become so big that millions of investors are invested in them, whether they realize it or not. A correction in their stock prices could have a wide-ranging impact on investments around the world," warned George Schultze, founder and managing member of Schultze. While there are similarities on the surface, there are also important differences between the dot-com bubble at the turn of the millennium and the rise of the Magnificent Seven. Stock fundamentals represent the biggest difference.

"The current high-fliers boast higher profit margins, faster company growth and healthier balance sheets than their predecessors. This helps them justify their premium valuations relative to the rest of the market and positive balance sheet momentum." According to the chief strategist, there is a striking contrast between the financings of a highly profitable company like Apple and darling 90s stocks like Pets.com. Back then, startups with unproven business plans reached market valuations in the billions of dollars. In the current era, tech giants are firmly entrenched in the global economy and are launching multi-sector operations. "Like any stock that has made significant gains over time, there is a risk that the price of these stocks will fall to more normalized or average levels and revert back to the mean," said Jason Betz, a private wealth advisor at Ameriprise Financial. Betz added: "No stock can outperform forever."