With the stock market indices hitting new all-time highs, one can’t help but ask: Are we entering into some kind of bubble? According to an interesting article from Ray Dalio, the legendary investor and founder of Bridgewater Associates, he seemed to think not.
In a LinkedIn post entitled, “Are We in a Stock Market Bubble?”, Dailo begins the discussion by zeroing in on the dramatic rise of the Magnificent 7 – a term coined by Bank of America strategist Michael Hartnett to describe the most dominant tech companies leading the charge:
- Apple (AAPL)
- Alphabet (GOOGL)
- Microsoft (MSFT)
- Amazon.com (AMZN)
- Meta Platforms (META)
- Tesla (TSLA)
- Nvidia (NVDA)
Since the beginning of 2023, the market gap of this club has risen over 80% – mostly due to all the excitement over AI and the promises it will supposedly bring. Due to their growth, these companies now make up over 25% of the market cap for the S&P 500.
So what did Dailo find? His article looks at six indicators and their parallels to other past stock market bubbles. Here are a few highlights.
Prices Seem Reasonable
Relative to traditional measures of value (e.g., cash flows based on current interest rates), share prices for the Magnificent 7 were pretty much right in line with where they should be. By this metric, Alphabet and Meta look somewhat cheap while Tesla appears to be relatively expensive.
P/E Is Not Yet Out of Control
An investor can often tell if the market is too optimistic about one company or another by looking at the P/E (price to earnings) ratio and seeing if it is unusually high relative to its peers. For example, during the 2001 tech bubble, the forward P/E of Cisco, one of the stock darlings of the time, hit 100. Meanwhile, the hot stock of our time, Nvidia, has a two-year forward P/E of around 27.
Looking at the Magnificent 7 as a whole, Dalio puts them in the 67th percentile for the aggregate market. While that’s a little higher than most other companies, it’s not yet time to throw any red flags.
The Floor Isn’t Too Crowded
Finally, I found this point to be interesting because it is one that most people would never think about. Bubbles often happen when FOMO (fear of missing out) kicks in and “new” investors pour money into the market without really understanding what they’re buying.
This situation happened during both the 1920s bubble (leading to the Great Depression) and the 1990s equity bubble. However, that doesn’t seem to be the case today. Despite the surge of investors during the whole “meme stock” craze, the article shows that the activity of new buyers is in the 55th percentile – higher than average but not particularly concerning.
Conclusion
In Dalio’s own words, the Magnificent 7 is measured to be “a bit frothy but not in a full-on bubble.”
In my opinion, I believe the true test of these stocks will be in seeing how AI lives up to the hype. If we’re presented with new products and efficiencies over the next few years that make life better, then perhaps the market was validated. However, if all that comes of these companies are chatbots that can make pretty pictures and answer your questions (often with half the response being factually wrong), then we may be in for a price correction.
Are you ready to lower the biggest expense in your life (TAXES!) and how to PROTECT your wealth through dozens of asset protection strategies? Check out our Wealth Building Package that will teach you all the strategies you need to know to get started today!
