In a lesson illustrating the dangers of skepticism amidst a buying frenzy on Wall Street, one need only look at the case of Rob Arnott. Just five months ago, Arnott, the respected founder of Research Affiliates, made a compelling argument that Nvidia Corp. was entering bubble territory. He described it as a “textbook story of a Big Market Delusion,” pointing to extreme valuations following a quadrupling of the company’s shares in just a year.
However, since Arnott’s cautionary warning in September, the so-called ‘bubble’ has expanded by around $800 billion. The greatest risk now, it seems, is not being part of the upward surge.
Arnott advises against short-selling bubble stocks when they’re on a roll but also emphasizes that one doesn’t necessarily have to own them.
While Wall Street acknowledges the risks posed by a few high-valuation stocks dominating the market, Arnott’s perspective may eventually prove correct. Nevertheless, following Nvidia’s exceptional performance in its recent report, it appears that no one can afford to miss the AI party.
Short interest in tech giants is almost nonexistent, analyst price targets are soaring, and both hedge funds and retail traders are adopting increasingly aggressive positions.
Alec Young, chief investment strategist at data platform Mapsignals, notes, “Right now, there’s no bear case… You don’t get a move like this in a company this big if the bears have a leg to stand on.”
For active managers, the pressure mounts daily to capitalize on the upward momentum, particularly across tech-driven indexes like the S&P 500 and Nasdaq 100, which have risen for 15 of the past 17 weeks. However, this surge has pushed the Nasdaq 100’s price-earnings ratio above 30 times and its multiple to sales to 5, figures reminiscent of the late 1990s dot-com era.
Despite concerns about valuations, the rapid earnings growth and the futility of betting against them have kept the Magnificent 7’s rally unabated, with short interest dwindling to just 1% of the group’s outstanding shares.
Hedge funds are increasing their ownership, and retail traders are driving demand for bullish options, reminiscent of the trading boom during the pandemic.
Even amidst this record-breaking rally, Nvidia’s valuation has become more reasonable since mid-2023, thanks to its impressive earnings growth.
Goldman Sachs Group Inc. tactical specialist Scott Rubner remarks, “It definitely was the most important stock on earth… These market cap gains have brought back animal spirits to the retail traders with activity on the message boards and call options at the highest level since March 2020.”
Nvidia’s stellar performance in its fiscal fourth quarter, with a 486% year-over-year gain in earnings per share, has further fueled bullish sentiment. The company’s projected first-quarter revenue of about $24 billion surpasses analyst estimates.
In response, bulls are increasing their price targets, with the average now standing at about $863, implying more than a 9% upside.
While some investors, like Shana Sissel of Banrion Capital Management LLC, express difficulty finding flaws in Nvidia’s story, others are exercising caution. Ken Mahoney, CEO of Mahoney Asset Management, acknowledges the potential slowdown and has trimmed exposure to Nvidia to lock in gains.
As major indexes soar, the gains are concentrated in a select few equities yet again, suggesting challenges for those betting on a broadening of the rally in the near term.
