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Analysts Fear That The 'Mag 7' Are Taking Us Into 'Tech Bubble 2.0'

AInvestMonday, Jan 29, 2024 5:18 am ET
2min read

Last year, the tech sector's Magnificent Seven led the S&P 500 to a 24% rise almost singlehandedly. This year, after a brief downturn at the start, tech stocks again surged, pushing the S&P 500 to record highs.

However, worries surfaced. According to reports, ex-Merrill and JPMorgan investment banker Jon Wolfenbarger warned in his January 22 report that the market savior of last year, the Magnificent Seven, could be an obstacle for the future market.

In the report, Wolfenbarger compared the current environment to the internet bubble of 1990-2000, claiming that we are now experiencing the Tech Bubble 2.0: For those of you younger than us who did not live through the Tech Bubble of the late 1990s, you are now living through Tech Bubble 2.0.

Given the fact that stock market valuations are even higher now than they were at the Tech Bubble peak of 2000, we would not be surprised by a similar decline in the coming recession.

This week, the leading tech titans, which comprise 29% of the total S&P 500 market value, will release their earnings reports, which will largely influence the overall trend of the S&P 500.

Wolfenbarger's viewpoint is far from lacking a rational basis.

For the S&P 500 itself, the adjusted price-earnings ratio is at a record high, meaning there is a trend to overestimate stock prices.

Second, the five highest market-cap companies in the S&P 500 index account for a historic peak of the total market value, implying the stock price trend of a few giants can impact the whole U.S. stock market trend, concentrating the risk.

Bank of America analyst Michael Hartnett sorted out the stock market's asset bubbles and found the return rate of AI concept trading soared to 200%, approaching the level around 2000.

Moreover, the Magnificent Seven determines the Wins and Losses, with economic recession as the main push.

Wolfenbarger also pointed out in his report that a U.S. economic recession will be the ultimate factor to puncture the tech bubble.

European asset management giant Natixis Bank also predicts that the growth of the U.S. economy will slow down in the coming year. Based on these predictions, the bank will decrease U.S. stocks in 2024.

Even though the market has begun to digest the Fed's lowering interest rates, the bank predicts that long-term high interest rates will impair the stock market and profits.

The bank also expects that the current best-performing stocks, led by the Magnificent Seven, will be severely impacted amid the economic slowdown.

We have yet to see the impact of interest rates on earnings, Craig Sterling, head of equity research, U.S., at Amundi's Investment Institute said. I would not want to be in a stock that's trading 20x, or perhaps 30x [forward] earnings when this rolls over, he said, referring to forward price-to-earnings ratios for the Magnificent Seven stocks, versus the roughly 16x ratio for the rest of the S&P 500.

Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.