Renowned hedge fund manager Ray Dalio, the founder of Bridgewater Associates, has offered reassurance to investors concerned about a potential bubble in big-cap tech stocks. In a report released on Feb. 29, Dalio highlighted Alphabet (GOOGL) and Meta Platforms (META) as “somewhat cheap,” suggesting that worries about overvaluation may be unfounded.
Dalio’s endorsement of what he dubs the “Magnificent Seven” stocks, which also include Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA), Amazon.com (AMZN), and Tesla (TSLA), comes amidst a notable average increase of nearly 14% in their value this year alone. Despite this surge, which has seen these companies collectively add $1.2 trillion in market value, Dalio maintains that they are “in aggregate fairly priced,” with the exception of Tesla, which he considers “somewhat expensive.”
The meteoric rise of these stocks might raise concerns among some investors, but Dalio suggests that such movements are characteristic of market dynamics. Nick Colas of DataTrek Research points out that a small fraction of undervalued stocks typically drive a significant portion of S&P 500 returns, citing academic research covering the period from 1990 to 2020.
Dalio’s assessment of the U.S. market reveals no signs of a bubble according to six key measures. Metrics such as broad market sentiment, leverage utilization, and extreme futures market speculation are all within reasonable bounds. While investor sentiment towards stocks is described as “neutral to slightly positive,” measures of leverage and new stock buyer activity remain moderate.
Although stock prices relative to traditional measures are relatively high, with S&P 500 valuations in the 73rd percentile, Dalio argues that they do not indicate a bubble scenario, especially compared to historical precedents where valuations exceeded the 90th percentile.
In summary, Dalio’s analysis suggests that fears of a bubble in the current market may be unwarranted, offering a degree of reassurance to investors.
