- Concerns about stock market concentration are growing as the Magnificent Seven giants continue to rise in value.
- If the AI bubble bursts, stocks could be in for a lost decade, similar to the end of the dot-com boom.
- Richard Bernstein told Business Insider that portfolio diversification is key for investors to avoid losses if the bubble deflates.
There are also growing concerns that artificial intelligence will become even more popular, leading to increased concentration in the stock market.
Nvidia's blockbuster fourth-quarter earnings boosted the company's market cap by $267 billion on Thursday, more than Netflix's total and setting an all-time record for single-day gains.
It is no exaggeration to say that AI trading is in full swing now that the Magnificent Seven has completed its latest earnings season.
But such parochial leadership has analysts warning of an AI-driven tech bubble reminiscent of two decades ago. Just as at that time, there are growing warnings that this bubble may burst.
“The important thing to remember is that bubbles always arise around new technologies and new developments. So far… so far… they have not resulted in widespread new problems. It's a little bit different in that we don't have any,” said Richard Bernstein, president of The Richard Company. Bernstein Advisors said in an email to Business Insider.
The bursting of the dot-com bubble marked the beginning of a lost decade for the stock market.
From 1999 to 2009, the S&P 500 returned -1% annually, while the Nasdaq's return was even worse, at -5% annually (the Nasdaq 100 returned -6% annually).
“In fact, if you had bought the Nasdaq at the peak of the tech bubble in March 2000, it would have simply taken nearly 14 years to break even,” Richard Bernstein Advisors wrote in a note last week. .
Fortunately, there's a simple solution to avoiding the fate of the dot-com era that befell investors, says the RBA: diversify.
“It has never been wise to avoid diversification, and that is certainly the case in a bubble environment. The key to future profits may be simple, basic diversification.”
Top 6 vs. Magnificent Seven
In the final year of the tech bubble in 1999, the thrill of Internet technology and its potential to revolutionize the economy caused some stocks to rise rapidly, with the S&P 500 Information Technology sector's total return reaching 103.76% that year. the RBA pointed out.
Meanwhile, “old economy” stocks were left behind by tech stocks, with the other six major S&P 500 sectors returning an average of 10.7%.
According to RBA analysis, many investors believe today's 'AI bubble' is very different from the bubble of a few years ago, as mega-cap leaders boasting high valuations with little profit. This is because it is a “real company,'' not a fake company.
Bernstein says this is a misconception.
As of December 1999, the six largest tech giants (Microsoft, Cisco, Intel, IBM, Oracle, and Qualcomm) were then legitimate companies with solid financial foundations and positive cash flow. However, once the bubble deflated, none of these stocks quickly recovered to their previous highs. It won't be until 2019 that Cisco's stock price fully recovers.
Currently, an AI-fueled bubble and pandemic-related excess liquidity have driven up stock valuations, leading to a highly speculative and concentrated market.
The Magnificent Seven stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) currently make up about 29% of the S&P 500. Bernstein said that while some of these companies have shown solid underlying growth, their growth is not unique compared to many others.
“Currently, there are approximately 140 stocks in the G7 stock markets (US, Canada, Germany, Japan, France, UK, Italy) that are expected to have earnings growth of 25% or more over the next 12 months. Only 3 stocks' Magnificent 7 passed the screen and the fastest growing Magnificent 7 is only #25,'' he said in a note.
Diversification is key
Bernstein reiterated that investors need to diversify their portfolios to avoid future losses that dragged them down in the years after the dot-com bust. Fortunately, there is a wide range of healthy investments beyond the biggest stocks, which the RBA claims represents a “once in a generation” opportunity.
“If your worldview turns out to be wrong, you'll end up with something that's more likely to perform well in that unexpected scenario. “You should always have a spare tire in your portfolio,” he told Business Insider.
He further distinguished between “economic opportunities” and “investment opportunities.”
“Technology always changes the economy. My favorite 'technology' that really changed the economy was the light bulb because it turned the economy into a 24-hour economy,” he said. “AI will change the economy, but that doesn't mean that investing in currently accepted AI stocks will be profitable in the long term.”
