There are many similarities between technology stock According to Bank of America Corp. strategists, this and past bubbles suggest the Magnificent Seven is getting closer — but not yet at a level that could cause it to pop.
They cite some indicators such as bond yields, valuations, and price action, which suggest there are further gains ahead for the group including Apple Inc. And Amazon.com Inc,
The team led by Michael Hartnett wrote that bond yields adjusted for inflation, seen as a proxy for tight financial conditions, are a common way for stock market bubbles to burst. According to their math, given the slope of debt around the global financial system, the real yield, which subtracts inflation from the Treasury 10-year yield, would be 2.5%, or 2.5% or so to end investors’ craze for artificial intelligence and mega caps. Must reach 3%. Technique. It is currently around 2%.
Valuation is another reason. With a price-earnings ratio of 45, the Magnificent Seven Group is expensive by any measure. But Hartnett’s research shows that previous rallies reached even more extreme levels before they peaked, with multiples of 67 for Japanese stocks in 1989 and multiples of 65 for the Nasdaq Composite in 2000.
“It’s not cheap,” Hartnett wrote, “but it’s true that valuations have been seen at bubble highs of late.” Another metric noted by Hartnett’s team is that the gains are smaller than other bubbles measured trough-to-peak. Since the December 2022 low, the Magnificent Seven has jumped nearly 140%. It’s not the 190% surge seen during the Internet bubble for the Nasdaq Composite or the 230% rally of FAANG stocks from Covid lows, strategists said.
Reading the data one might suspect that these are still warning signs for investors hoping for the rally to continue. Hartnett points out that “no two bubbles are alike.”
The appetite for tech stocks has remained consistent this year, with the Magnificent Seven’s index up nearly 12% so far in 2024. And the latest fund flow data shows that global investors are increasing their bets.
Nearly $2.3 billion was added to funds focused on tech stocks in the week to Feb. 14, Hartnett said, citing EPFR data. Nearly $60 billion flooded into stock funds over the past four weeks, the biggest such waste in two years. Futures contracts on the Nasdaq 100 index rose 0.5% on Friday.