U.S. Tech Stocks Bubble Has 244% Room to Grow, Strategists Say

American bank strategists have asserted that the bubble formed by large U.S. tech stocks over the past two years still has room to expand, and investors should prepare for further gains. The team, led by Michael Hartnett, analyzed 10 stock market bubbles since the 20th century and found that the average increase from the low point to the peak during these periods of extreme overvaluation was 244%. This suggests that the so-called "Magnificent Seven" stock portfolio, which has risen 223% since its low point in March 2023, still has room to rise further.

The current valuation also supports the view that this stock portfolio has further room to rise. Historically, stock market bubbles typically end when the price-to-earnings ratio reaches 58 times, at which point these stocks are 29% higher than their 200-day moving average. Currently, the seven stocks—Tesla, Alphabet, Apple, Meta Platforms, Amazon, Microsoft, and Nvidia—have a price-to-earnings ratio of 39 times and are only 20% higher than their 200-day moving average. Strategists believe this makes them the "best bubble representatives" today.

Investor enthusiasm for U.S. tech giants has driven the U.S. stock market to new highs this year, with no signs of slowing down. After the initial shock from China's AI startup DeepSeek and the turbulence caused by Trump administration tariff policies, the "Magnificent Seven" quickly rebounded. The S&P 500 Information Technology Index has surged 56% since its low point in April, with investors continuing to buy on dips.

A positive macroeconomic backdrop, sustained hype around artificial intelligence, and expectations of further rate cuts by the Federal Reserve are all providing support for the tech sector. In fact, the bank's fund manager survey this week showed that "going long on the Magnificent Seven" has been seen as the "most crowded trade" by 42% of respondents for the second consecutive month.

Strategists at the bank noted that bubbles are often short-lived and highly concentrated. Looking back at 2000, when internet-related stocks soared to extreme levels, the tech sector rose 61% in just six months, while all other sectors of the S&P 500 index fell that year. Meanwhile, investors should also hedge their exposure to the tech stock bubble by holding some "value trap" assets. Potential opportunities in this category currently include Brazil, the United Kingdom, and global energy stocks.