/

Are the Magnificent Seven stocks a bubble?

666 views
3 mins read

The dominance of Meta, Microsoft, and Nvidia, along with Apple, Alphabet, Amazon, and Tesla, the so-called Magnificent Seven, is beginning to rattle nerves among some investors and analysts who fear that a speculative bubble is forming.

Up to February, these tech behemoths accounted for about half of the gains in the entire S&P 500, and also contributed to over a quarter of the index’s total market cap.

Nigel Green, CEO of a leading independent financial advisory and fintech, said this is currently more indicative of “a fundamental shift”, primarily propelled by advancements in artificial intelligence (AI).

“Nvidia, in particular, has been making headlines with an astonishing 50% surge in its stock value within the first two months of the year,” deVere Group’s Green said, as US stocks set another record following mixed reports on the U.S. economy.

The S&P 500 rose 29.11 points, or 0.6%, to 5,029.73 and squeaked by its prior all-time high set last week. The Dow Jones Industrial Average gained 348.85, or 0.9%, to 38,773.12, and the Nasdaq composite climbed 47.03, or 0.3%, to 15,906.17.

“However, labelling this surge as a bubble requires a nuanced understanding of the underlying factors driving these unprecedented gains,” Green added.

Rather than a speculative mania, the market’s response to the Magnificent Seven seems to be grounded in the transformative power of AI, which is reshaping entire industries, enhancing productivity, and paving the way for the creation of new ones, he explained.

“At the heart of this paradigm shift is the increasing integration of AI technologies across various sectors.

“Meta’s focus on the metaverse, Microsoft’s investments in cloud computing and AI-driven solutions, and Nvidia’s prowess in graphics processing units (GPUs) for AI applications underscore the importance of these companies in shaping the tech landscape.

“Their combined market capitalisation reflects investor confidence in the long-term potential of AI to drive innovation, efficiency, and profitability,” noted the deVere CEO.

Expansion of AI applications

One key factor contributing to the sustained growth of the Magnificent Seven, he said, is the ongoing expansion of AI applications.

“These companies are not merely riding the wave of current technologies, but actively shaping the future of AI.

“Meta, for instance, is investing heavily in AI research to create more immersive and interactive experiences within the metaverse. Microsoft’s Azure cloud platform leverages AI to offer scalable and intelligent solutions for businesses, demonstrating a commitment to AI-driven transformation.”

Green added that Nvidia’s remarkable stock performance can be attributed to the increasing demand for GPUs in AI and machine learning applications.

As industries across the board integrate AI into their operations, the need for powerful hardware accelerators becomes paramount. Nvidia’s strategic positioning in this space positions it as a key player driving the AI revolution.

“The surge in its stock value reflects not only current market trends but also anticipation of sustained demand for its products as AI adoption continues to grow.”

Furthermore, the Magnificent Seven’s impact extends beyond their individual successes.

“Collectively, they are shaping the broader market sentiment and influencing investment strategies. Investors are recognising the pivotal role these companies play in the AI ecosystem, prompting a re-evaluation of traditional valuation metrics.

“The premium placed on these stocks reflects a consensus that they are at the forefront of a transformative era, where AI is not just a technological advancement, but a fundamental driver of economic and industrial change,” said the deVere Group CEO.

Different from 1990s bubbles

Importantly, the current landscape differs from historical bubbles, such as the dot-com bubble of the late 1990s.

“Back then, many companies with little to no profitability were valued based on speculation rather than concrete fundamentals.

“In contrast, the Magnificent Seven are established giants with robust financials and a clear strategic vision for the future. Their investments in AI are not speculative gambles but calculated moves to stay ahead in an evolving technological landscape,” said Green.

As these companies continue to invest in AI research and development, the benefits are likely to extend to a wide range of sectors. Manufacturing, healthcare, finance and beyond stand to gain from the increased efficiency, automation, and data-driven decision-making facilitated by AI technologies.

The deVere CEO said the market’s response to the Magnificent Seven reflects an understanding that their influence goes beyond their current market share – they are paving the way for a future where AI is woven into the fabric of everyday business operations.

“We expect to see some more volatility in the markets than we’ve seen recently, but it’s almost inevitable that the longer-term winners will be stocks which are driven by AI,” Green concluded.