Photo illustration by Jonathan Raa/NurPhoto via Getty Images
As the “Magnificent Seven” continues to rise, concerns about stock market concentration are growing.
A burst of the AI bubble could mean a lost decade for stocks, similar to the end of the dot-com boom.
To avoid losses if the bubble bursts, investors need to diversify their portfolios, expert Richard Bernstein told Business Insider.
This is a machine translation of an article from our US colleagues at Business Insider. It was automatically translated and checked by a real editor.
The enthusiasm for artificial intelligence (AI) is increasing – and with it the fear of increasing concentration on the stock market.
Nvidia’s resounding profit for the fourth quarter on Thursday increased its market capitalization by $267 billion (the equivalent of almost €246.5 billion), more than the entire value of Netflix. Nvidia set a record for the largest increase in one day in history.
Read too
What mistakes “buy and hold” investors should avoid, according to an investor with a six-figure portfolio
As the “Magnificent Seven” – big tech companies like Nvidia – wrap up their latest earnings season, it’s fair to say that trading AI stocks is in full swing. But given this development, analysts have warned of an AI-driven tech bubble reminiscent of two decades ago. Similar to back then, there are increasing warnings that the latest bubble will burst.
“The most important thing is that there are bubbles always revolve around a new technology or a new development. This bubble is a little different in that it has not yet led to widespread new problems,†Richard Bernstein said in an email to Business Insider. Bernstein is the president of the asset manager Richard Bernstein Advisors (RBA).
From 1999 to 2009, the S&P 500 returned minus one percent per year and the Nasdaq performed even worse at minus five percent per year (minus six percent per year for the Nasdaq 100).
“If you had bought the Nasdaq at the height of the tech bubble in March 2000, it would have taken nearly 14 years to reach profitability,” Richard Bernstein Advisors wrote in a note last week .
Fortunately, there is a simple solution to avoid the dot-com era fate that befell investors, explains RBA: diversification.
“It has never been wise to forego diversification, and this is especially true in bubble times. The key to future returns could be simple, fundamental diversification.”
Read too
Microsoft announces “head-to-head” race for AI with China and invests 3.3 billion euros in German companies
The Top Six vs. the Magnificent Seven
In the final year of the tech bubble, 1999, enthusiasm for Internet technology and its potential to revolutionize the economy sent a handful of stocks soaring. The S&P 500 information technology sector delivered a total return of 103.76 percent that year, RBA reports.
Meanwhile, “old economy” stocks were left behind by technology. The six other major S&P 500 sectors achieved an average return of 10.7 percent.
According to the RBA analysis, many investors believe that today’s “AI bubble” is very different from the bubbles of years past. Because the leading mega-caps are “real companies” and not those that achieve high valuations with low profits. That was a misunderstanding, said Bernstein.
The six biggest tech titans in December 1999 – Microsoft, Cisco, Intel, IBM, Oracle and Qualcomm – were reputable companies at the time with solid financial positions and positive cash flow. But when the bubble burst, none of these stocks quickly recovered from their previous highs. Cisco shares only fully recovered in 2019.
Today, the AI bubble and pandemic-related excess liquidity have driven up stock valuations and led to highly speculative and concentrated market leadership.
The “Magnificent Seven” – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – now make up around 29 percent of the S&P 500. Bernstein said that while some of these names have solid fundamental growth, the growth is not exceptional compared to many other companies.
“In the G-7 stock markets (US, Canada, Germany, Japan, France, UK and Italy), there are currently approximately 140 stocks that are expected to see earnings growth of 25 percent or more next year. Most importantly, only three of the Magnificent 7 pass this test and the fastest growing of the Magnificent 7 is only ranked 25th,” he said in the release.
Read too
One million euros in my portfolio: I did it with these ETFs
Expert: Diversification is key
Bernstein reiterated that investors need to diversify their portfolios to avoid future losses, which plagued portfolios in the years following the dot-com bust. Fortunately, offering solid investments outside of the largest stocks represents a unique opportunity, explains the RBA.
“If their worldview turns out to be wrong, you have something that will likely fare better in this unforeseen scenario. “So you should always have a spare tire in your portfolio in case you make a mistake,” he told Business Insider.
He also distinguished between “economic opportunities” and “investment opportunities”.
“Technology always changes the economy. “My favorite ‘technology‘ that significantly changed the economy was the light bulb because it turned the economy into a 24-hour economy,” he said. “AI will transform the economy, but that doesn’t mean investing in the AI stock accepted today will prove profitable in the longer term.â€
External content not available
Your privacy settings prevent the loading and display of all external content (e.g. graphics, tables, subscription login) and social networks (e.g. Youtube, Twitter, Facebook, Instagram etc.). To display this, please activate the settings in the privacy settings -Settings.
Change privacy settings
Read too
Insider tip Swiss stocks? A financial expert reveals her favorites