The current fervor surrounding the “Magnificent Seven” tech stocks is triggering parallels to the dot-com bubble, raising concerns among analysts about potential risks for latecomers to the party.
Analysts warn that the breathtaking ascent of the Magnificent Seven, including Apple, Alphabet, Microsoft, Amazon, Meta, Tesla, and Nvidia, echoes historical bubbles, particularly the dot-com boom of the late nineties. The dot-com era, marked by the surge and subsequent collapse of companies like Pets.com and Webvan, is resurfacing in discussions as investors flock to high-flying tech names.
Goldman Sachs research indicates that the S&P 500 is currently experiencing an unprecedented level of concentration in these seven stocks, contributing significantly to the index’s overall gains. This growing divergence between tech giants and the rest of the S&P 500 draws comparisons to the inflated valuations of the dot-com era.
The Magnificent Seven, encompassing hardware, software, artificial intelligence, and cloud computing, has collectively surged by 80% this year. When these stocks are excluded, the rest of the S&P 500 shows minimal growth, according to Torsten Slok, Chief Economist at Apollo Global Management.
The excitement surrounding the growth of these tech giants, driven by artificial intelligence, is reminiscent of the dot-com bubble, with average P/E ratios above 50. Analysts caution that the valuations are approaching levels seen during the tech bubble in 2000.
The outsized role of the Magnificent Seven on Wall Street poses broad risks, as millions of investors are exposed to these companies, often unknowingly. A potential correction in their stock prices could have widespread impacts globally, according to George Schultze, Founder of Schultze Asset Management.
Despite surface-level similarities, analysts highlight fundamental differences between the current tech surge and the dot-com era. The present high flyers boast higher profit margins, faster growth, and healthier balance sheets, justifying their premium valuations. Unlike the dot-com era, today’s tech giants are well-established in the global economy, operating across multiple industries.
Analysts also note that the current market context differs, with 2023 potentially representing a rebound from the 2022 pullback in mega-cap tech stocks. Even if a correction occurs, historical data suggests the market can still yield strong returns when its leaders lose momentum.
While cautionary voices are emerging, calling attention to the risk of a reversion to the mean, the party continues. Investors are advised to stay vigilant, recognizing that no stock outperforms indefinitely, as emphasized by Jason Betz, a Private Wealth Adviser at Ameriprise Financial.
