Is the AI-inspired tech boom about to go bust? The “Magnificent Seven” stocks continue to outperform. But chief analysts say they’ve seen this all before – and they don’t like the looks of it. The market behavior is eerily similar to the 1990s dot-com bubble. And when that one went pop it took a decade to recover. Steel yourself: the telltale signs of a bubble about to burst are upon us.
The 'Magnificent Seven’s' Breathtaking Rally
In 2023's incredible tech rally, the “Magnificent Seven” companies – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – led the charge. These AI and tech titans appreciated an unparalleled average of 111% last year. 1
This eye-popping outperformance is still in full swing in 2024. In January, the “Magnificent Seven” accounted for a whopping 45% of the S&P 500 return in January. In February, a record-smashing highlight: Nvidia’s single-day market cap gain of $277 billion in February. And the tech stock price continues to soar with new highs day-by-day. 2, 3, 4
By any metrics, it’s been an outstanding run.
But now, the man who coined the term “Magnificent Seven” says things no longer look so magnificent. Bank of America Chief Market Strategist Michael Harnett sees signs of bubbly behavior brewing.
Bubble Trouble: Compelling Parallels
Harnett notes that today’s market has several striking similarities to the market zeniths of the past. Signs of a bubble on the brink include:
Highly concentrated market leaders:
The “Magnificent Seven” accounted for 71% of the S&P 500 gains in 2023. This narrow market leadership is much like we saw in the 1990s, when the crash ushered in a lost decade for the stock market.
Tanking yields:
The fourth quarter’s sinking yields boosted Nasdaq prices. But in January, both prices and yields bumped up. A similar dynamic preceded the dot-com bubble’s infamous pop.
Meteoric gains:
Compare the “Magnificent Seven’s” 111% 2023 gains to the following. In the 1920s the market roared with a 180% rise before the notorious crash. And in the 1970s the “Nifty 50” blue-chip stocks shot up 150%, harkening a bull market. As for the 1990s, the rally in the tech sector brought gains of 103%. 5, 7
The rapid ascent of stocks, slumping yields, and the concentration of market cap in tech stocks, signal a market teetering on the edge of a similar fate. The Shiller price-to-earnings ratio confirms this, standing at one of the highest levels in history, surpassing that of even the 1929 crash. 6
The AI Difference Is an Illusion
Despite the undeniable similarities between today’s market behavior and the bubbles of yesteryear, some investors believe that things are different today. They think that the companies that suffered in the dot-com bust were those with overinflated valuations and weak earnings. They contrast this to today’s “Magnificent Seven,” which they view as “real” companies, with strong financials.
However, this is a dangerous mis-read. In 1999 the six largest tech titans – Cisco, IBM, Intel, Microsoft, Oracle, and Qualcomm – were all robust companies. They had positive cash flow and strong financial positions. But when the bubble went pop, they all went down. And the recovery was bleak. 7
Beyond the Bust: The Lost Decade
In 1999, the dot-com heyday was in its final throes. The allure of internet technology and its potential to radically reshape the economy sent a select number of stocks soaring to a total return of 103% that year. “Irrational exuberance” was in full swing. 7
Then came the pop.
The bursting of the dot-com bubble ushered in a lost decade for the stock market. From 1999 to 2009, the S&P 500 returned -1% per year. The Nasdaq fared even worse at -5% per year (-6% per year for the Nasdaq 100). 7
With the specter of an AI bubble looming large, where can a prudent investor find sanctuary?
The Refuge: Diversification
The echoes of the dot-com days resonate with a clear message: diversification is paramount. Investment strategist Richard Bernstein advises diversification as the safeguard against the repeat of a tech-led market crash. The lesson is clear: don't put all your eggs in one digital basket. 7
"Shunning diversification has never been prudent, and that's certainly true during bubble environments. The key to future returns may be simple, basic diversification." 7
The “Magnificent Seven” may be propelling the market today, but the lessons from the post-dot-com era suggest a cautious approach. Despite today's AI-driven enthusiasm, the fundamentals of investment remain unchanged. Many “real companies” with robust financials were left reeling for years after the inevitable crash. The call for diversification rings as true now as it did two decades ago.
A Shining Option, Gold
In this context, gold emerges as a bastion of stability. As tech stocks soar to dizzying heights, the appeal of physical precious metals in a Gold IRA becomes ever clearer. Gold's intrinsic value offers protection against market volatility and the potential for long-term portfolio security. In the face of a tech-driven bubble burst and the resulting lost decade of recovery like we saw in the 1990s, a Gold IRA could preserve your assets. The timeless sheen of gold in one's portfolio might just be the beacon of stability in the looming storm. To learn more about this attractive option, you can explore American Hartford Gold reviews.
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Max Baecker is the COO of American Hartford Gold, the nation’s largest retailer of gold and silver. He is committed to American Hartford Gold’s mission of helping clients achieve long-term financial security by providing them with unparalleled knowledge on precious metal markets and products.
Max specializes in helping clients build long-term wealth through the security and stability of precious metals. Under his guidance, American Hartford Gold has delivered over $1 billion in precious metals to thousands of satisfied clients.
American Hartford Gold is the #1 ranked gold company in the prestigious Inc. 500 2021 List of America’s Fastest-Growing Private Companies. It holds an A+ Rating from the BBB and a 5-Star Rating on Trustpilot with thousands of 5-star reviews. AHG offers investment-grade gold and silver coins and bars at competitive prices. Clients also benefit from its buy-back commitment with no back-end fees. American Hartford Gold is the only precious metals company trusted and recommended by Bill O’Reilly and Lou Dobbs. To learn more, visit American Hartford Gold.
1.
https://www.forbes.com/sites/greatspeculations/2024/01/22/2023-in-review/?sh=139bbd6690bb
2.
https://markets.businessinsider.com/news/stocks/tech-stocks-magnificent-7-dot-com-1999-bubble-inflation-recession-2024-2?utm_medium=referral&utm_source=yahoo.com
3.
https://finance.yahoo.com/news/chart-of-the-week-heres-how-big-nvidias-record-setting-thursday-was-133001505.html
4.
https://www.macrotrends.net/stocks/charts/NVDA/nvidia/stock-price-history#:~:text=The%20all%2Dtime%20high%20NVIDIA,below%20the%20current%20share%20price.
5.
https://www.morningstar.com/news/marketwatch/20240216268/based-on-hundreds-of-years-of-bubbles-this-is-what-may-finally-halt-ai-magnificent-seven-stock-run
6.
https://www.multpl.com/shiller-pe
7.
https://uk.finance.yahoo.com/news/investors-avoid-lost-decade-stocks-044447450.html
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