It's beginning to look a lot like Christmas. 1999.

hallmark

I guess we're all pretty familiar with "the market can stay irrational a lot longer than you can stay solvent".  And also don't try to time the market.  And although I'm probs a perma-bear I'm drip-feeding regardless and have been forra couple years.

Nevertheless, Nvidia gaining 240 BILLION in a day?  And currently valued approximately the same as the whole of Germany?   It already looked a bit similar to the dotcom boom but this really does smack of the last blowout that often precedes a bubble bursting.

Longterm I'm very bullish on some of the Mag7 (Amazon, Alphabet) and maybe we are in a new paradigm and big tech is just going to change how things usually work.   But these valuations just seem crazy and unsustainable to me.

I'm probably wrong, feel free to disagree, just curious what others think

El_Torro

I don't tend to concern myself too much with how individual companies are doing. Almost all of my investments are in multi asset funds, which do have a lot of money in the massive tech companies, of course. If some / all of them do badly then other companies / sectors should rise up to pick up the slack.

I have heard some rumblings about Nvidia in recent weeks, I didn't realise it was ballooning that much though. I might do some follow up reading. I won't be buying any individual Nvidia shares though, that ship probably sailed some time ago. 

Sea_Shell

Our Rathbone Global fund has ~3% Nvidia.

The fund's doing well 😉

NoviceInvestor1

Heading into 2000 the Nasdaq PE ratio was 175 x earnings according to Bloomberg and Nasdaq;

https://money.cnn.com/2015/03/10/investing/nasdaq-5000-stocks-market/index.html

As of today it's 32; https://www.barrons.com/market-data/stocks/us/pe-yields

That seems quite different to me...

GazzaBloom

NoviceInvestor1 said:

Heading into 2000 the Nasdaq PE ratio was 175 x earnings according to Bloomberg and Nasdaq;

https://money.cnn.com/2015/03/10/investing/nasdaq-5000-stocks-market/index.html

As of today it's 32; https://www.barrons.com/market-data/stocks/us/pe-yields

That seems quite different to me...

As is the fact that today's Mag 7 are hugely profitable companies with enormous cash moats.

It could be argued that companies like Apple and Microsoft are so well established that they are becoming "value" rather than "growth" companies. Not that I attribute much credence to such glib stock market terms.

That said, there is certainly mania and speculation abound but holding a diversified low cost index for the long term that includes these holdings isn't something I worry about personally.

In my opinion, it doesn't take a lot of looking to find something to fear, worry about or doubt when it comes to investing money into the stock market and bears and pessimists will always be ready to highlight the downfalls and sudden crashes from the past. This is as true today as it was 100 years ago. You have to have a degree of faith in global capitalism and take a long view and be ready to tough out the market crashes and sometimes slow recoveries without capitulating to erratic behaviour in order to benefit the most.

I think we hold about 5-6% Nvidia across a few index funds.

coastline

NoviceInvestor1 said:

Heading into 2000 the Nasdaq PE ratio was 175 x earnings according to Bloomberg and Nasdaq;

https://money.cnn.com/2015/03/10/investing/nasdaq-5000-stocks-market/index.html

As of today it's 32; https://www.barrons.com/market-data/stocks/us/pe-yields

That seems quite different to me...

There'll be some kind of correction no doubt but we don't know when ? NVIDIA price has been relentless but earnings are growing fast. Analysts are increasing forecasts yet again after this weeks results . Look at EPS trend in the link and 2026 is forecast $25 and rising. $780 / $25 = P/E of 31. Growth shares often trade on these multiples its nothing new. How do we know where AI is going ? This might be just the start . Look at the internet 25 years ago . Now we've got the lot on a handset.

 NVIDIA Corporation (NVDA) analyst ratings, estimates & forecasts – Yahoo Finance

Look at the FTSE p/e ratios on here . Nobody mentions many are high . Why because market capitalisation is only a few billion. People just focus on the aggregate P/E where the FTSE is 11 and the US is nearer 20 . So the US is overvalued ? . Have the rest of the markets ever escaped a downturn in the US .? Don't think so. See how it goes.

FTSE-100 Stocks by PE Ratio (Price Earnings) – topstocktable.com

AlanP_2

Discussed by John Authors of Bloomberg (ex FT) in his newsletter today, you'll need to Google to find original with the images:

This isn’t yet an extreme bubble to match some from history

It could yet turn into one, particularly if the Fed cuts rates without slowing the economy

Valuations of US tech are too high — but could easily go higher

Concentration is extreme, and in time will prove self-contradictory

For now, there is little sign of excessive leverage

TIP: Five hours of music for insomniacs. 

An NBubble?

Cue Prince. Once again, it appears that markets are partying like it’s 1999. Prince’s 1983 song was financially prophetic. In 2000, it would be “party over, oops, out of time!” Therefore, everyone should live life to the full the year before. That’s just what happened 16 years later. Current comparisons to the epic melt-up in dot-com stocks look reasonable.

As the world contemplates the phenomenal growth of Nvidia Corp., whose market worth has just surged by more than $275 billion in response to its ongoing surge in profits, thoughts turn not only to dot-coms but the Great Crash of 1929 and even the 49er Gold Rush.

Such comparisons must be handled with care. The dot-com era was extreme. Markets can get badly overblown, and set themselves up for a crash, without ever going as bonkers as in 1999. Serious signs of speculation don’t guarantee a bubble will inflate that far before bursting. With that caution in mind, here’s the Points of Return check list of bubble questions:

Is There Something to Be Excited About?

Yes, there definitely is. History’s bubbles have been driven by innovations that are clearly consequential, but whose future and valuation are impossible to ascertain. Rather than miss out, people pile into genuinely exciting technology, and many lose their shirts even though it succeeds. That was true not only of the internet, but also canals, railroads and the motor car. Even if AI proves as big, it could happen again. Nvidia has unquestionably done something exciting. This is how its earnings per share have increased since it floated in 1999 (of all years):

Nvidia has sold much more stuff for a far bigger profit in the last 12 months. It also has a clearly defined idea that’s easy to grasp, in artificial intelligence. This is nothing at all like the absurdity 25 years ago, when companies came to market before they’d even made any revenues, let alone profits. This time, there is a “there” there. The problem is that the presence of something this exciting adds to the risk that a bubble will form.

The excitement is justified. Photographer: I-Hwa Cheng/Bloomberg

Is There Cheap Money Available?

Charles Kindleberger in his classic tract Manias, Panics and Crashes suggests that cheap money in some form is another necessary condition for a bubble. As we know, rates are their highest in decades. However, we’re in the very unusual position where the market is surging to all-time highs amid plenty of froth, and yet money is expected to get cheaper very soon. That’s why Citigroup’s strategists believe the AI bubble can go further:

In 2000, it took aggressive Fed hikes to burst the bubble. This time around, the Fed may well cut into the formation of an equity bubble. This suggests to us to keep our overweights in the US, and remain overweight technology.

That leads to a related question:

Does Behavior Suggest Excessive Speculation?

A bubble’s final stage is almost entirely about judging human behavior; buy an asset because it’s rising, and sell before it crashes. You can identify this in one way by looking at technical patterns, of how swiftly share prices are advancing. On that basis, we can say this is at best a very pale imitation of 1999. The following chart compares the Nasdaq 100’s performance over two periods — starting in October 1998 when the dot-com melt-up began, and from the start of the current upswing in December 2022 (apologies for the limitations of our graphical software). So far, this rally is far behind the dot-com schedule.

There’s relatively little evidence of excessive use of leverage within financial markets, even if higher rates aren’t yet slowing down the US economy as had been expected. John Higgins of Capital Economics in London offers this chart showing that margin debt on the New York Stock Exchange has fallen significantly in recent weeks as the market surged:

Higgins makes the following case:

Unlike most bubbles, this one hasn’t been accompanied, at least so far, by obvious signs of high and rising leverage... Margin debt has actually been falling recently. And the ratio of margin debt to the size of the stock market has been doing likewise. 

People aren’t as yet behaving as they do in a bubble’s final speculative stage, which is good to know. The possibility of interest rate cuts does, however, suggest that fuel may be on the way.

What About Valuations? Is the Market too Expensive?

Yes, the US market is really bad value. (Plenty of others look much cheaper.) US tech stocks look almost as expensive relative to the rest of the world as in 2000. This chart is from Dhaval Joshi of BCA Research:

Again, we are not yet at extremes, and in any case valuation is terrible for timing. Keynes was right to say that a market can stay irrational longer than most people can stay solvent. But it’s important to note that stocks definitely look expensive relative to bonds. This chart, also from Higgins, shows a simple measure of the equity risk premium — the extra yield you get from stocks compared to bonds. It’s the lowest (meaning stocks are the most expensive) in two decades. It’s nowhere near as bonkers as in 1999-2000, when the premium somehow went negative:

So on this basis, it’s not a great time to buy US stocks, but things could easily get more stretched. The fed funds rate cuts that everyone expects would be a test. Will Denyer of Gavekal suggests that a continued rally “likely depends on one or both of the following: (i) earnings continue to exceed expectations; (ii) the Federal Reserve cuts rates and real bond yields fall—with no recession.” Either could happen, and neither is a given. 

Is Concentration in the Market Excessive?

Anyone who’s followed the excitement over the “Magnificent Seven” tech stocks, of which Nvidia is a member, will be aware that the market is very concentrated at present. There are different ways to measure this; none are encouraging. This is from Deutsche Bank’s Jim Reid, and measures the weight of the top 10% of stocks in the S&P 500:

The only previous time US stocks were this top-heavy was in 1929. Once the figures are updated for this week, it’s quite possible we’ll be at a record. That’s uncomfortable. 

If we take a different definition and look at the weight of just the top 10 stocks within the S&P 500, the current situation sticks out even more. S&P Dow Jones Indices kindly provided me with numbers back to 1980, and I added the most recent figure after Thursday’s close:

For the first time in at least 43 years, and probably ever, more than a third of the S&P 500 is in just 10 stocks. It’s hard to draw any statistically valid conclusions, but notable that concentration tends to be greatest just before big market falls. So this, too, is disquieting. The tech sector is further ahead of the market than even at the top in 2000:

Does It Matter That Companies Are So Big?

This is critical. Big companies got bid up to silly valuations in 1999, but smaller ones went ballistic. Nothing like that is afoot today in small caps. The issue, I think, is a genuinely new one. Companies just haven’t been this big ever before, relative to everyone else. I certainly can’t remember any one set of corporate results mattering as much to the entire financial world as Nvidia this week. But it makes sense because, as shown in this great chart from Reid, the Magnificent Seven stocks are now bigger than your average country. The companies between them make more money than any countries bar the US, China and Japan (which is only just ahead): 

This is a big deal and leads to a crucial question:

Does It Make Sense?

Are the assumptions about what’s going to happen in the real world consistent with what we can truly expect? In the case of the mega caps, can they possibly stay this dominant? Joshi suggests not. Tech companies’ profits are growing far faster than everyone else’s. That implies, presumably, that their money is being made at the cost of others, which is perfectly legitimate if true but suggests problems for the overall market. 

The Magnificent Seven do compete against each other. And if their dominance expands, we can expect politicians to try to stop them in some way. Or, capitalism might do the job by prompting innovations that allow new firms and technologies to compete. Plenty of companies in the past had apparently impregnable positions and were ranked among the five largest in the US, only to fade. Examples include Sears Roebuck, General Electric Co., AT&T, Eastman Kodak Co., and Intel Corp. In the case of Intel, the decline is phenomenal. The world’s former dominant chipmaker is worth $300 billion less than in 2000. At one point, Intel’s market cap was $497.6 billion bigger than Nvidia’s; now it’s $1.78 trillion behind. Dominance isn’t necessarily forever, but now that the Magnificents are deemed to have macro importance, a Kodak-like decline would hurt for the world at large.

Disrupted. Photographer: Patrick T. Fallon

There’s also the issue of whether we can buy access to the growth from AI. In 2000, by and large, we couldn’t: Google wasn’t yet public, and Facebook didn’t exist. Amid gold rushes, Joshi points out, there’s an instinct to buy “picks and shovels” — the infrastructure enabling people to mine for gold. That might help explain the huge rise in demand for Nvidia’s chips, as people perhaps over-arm themselves with AI picks and shovels. It also explains Cisco’s brief tenure as the world’s largest company in early 2000, and the fervor around mobile telephony in the 1990s. The problem is that even when a technology fulfills all the greatest hopes in it, as when everyone got a phone for their pocket, the companies that seem like a direct stake won’t necessarily profit. Reid’s chart compares the growth in mobile phones with the performance of telecommunications stocks:

If you bought in 2000, you were dead right about the future growth of mobile telephony. And you lost a hideous amount of money. 

So, Is This a Bubble?

If 1999 is our benchmark, this definitely isn’t a bubble just yet. That could change if cheaper money is added to the classic pre-condition of an exciting new technology on which people don’t want to miss out. Those who wish to try the dangerous job of timing a bubble probably have a while to do so. Beyond judging how others will behave, though, piling in would imply confidence that the soft economic landing with lower rates scenario actually comes true, along with confidence that the biggest companies will carry on growing unimpeded. If that happens, there’s plenty more partying ahead. Just try not to think what would come after

Cus

hallmark said:

I guess we're all pretty familiar with "the market can stay irrational a lot longer than you can stay solvent".  And also don't try to time the market.  And although I'm probs a perma-bear I'm drip-feeding regardless and have been forra couple years.

Nevertheless, Nvidia gaining 240 BILLION in a day?  And currently valued approximately the same as the whole of Germany?   It already looked a bit similar to the dotcom boom but this really does smack of the last blowout that often precedes a bubble bursting.

Longterm I'm very bullish on some of the Mag7 (Amazon, Alphabet) and maybe we are in a new paradigm and big tech is just going to change how things usually work.   But these valuations just seem crazy and unsustainable to me.

I'm probably wrong, feel free to disagree, just curious what others think

I think the devil's in the detail. Tesla (remember them?) is approx 50% off it's high, netflix still not above it's previous high, there are others. Follow the index, imo opinion, there is not going to be a crash.  Then again, if everyone thinks there won't be a crash then that's when it will probably happen.

Hoenir

hallmark said:

Longterm I'm very bullish on some of the Mag7 (Amazon, Alphabet) and maybe we are in a new paradigm and big tech is just going to change how things usually work.   But these valuations just seem crazy and unsustainable to me.

That's why you've got to remain grounded as an investor. Seperate fact from the fiction. Be realistic about future expectatations. Read an article the other day that suggested that around 42% of the rise profits in the US major caps over the past 3 decades could be attributed to 3 major factors. Globalisation (Chinese low cost production), interest rates and systematic tax planning. Looking forward the same tailwinds being available are far less probable. 

 As for Nvidia. Worth noting that 20% of it's revenue is generated in China. High dependence on TSMC for it's hardware. A re-elected Trump is unlikely to be welcomed. 

1404

Is it just me or does this thread look like this to other people?:

Poster A: "I fear we are in a bubble which will burst. NVDA is a concern"

Poster B, C, D etc: "Don't worry about it. My funds have NVDA and they are doing well. Just chill (wink emojis)"

Largs

*off topic* But just to say, after seeing the title of this thread, that song is stuck my head now.  It's not Michael Buble though, think it's Jonny Mathis