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The U.S. Standard & Poor’s (S&P) 500 index has been on a tremendous rise this year, repeatedly breaking its all-time highs. This has sparked a debate about whether the stock price is in a bubble. The controversy has grown significantly as NVIDIA, a leading Artificial Intelligence (AI) stock that had risen nearly 80% this year, plunged 5.5% last week. However, the consensus in Wall Street financial markets is that the current stock market situation is distant from a typical bubble scenario.
Bloomberg reported on the 10th that “the S&P 500 index has broken its all-time high 16 times this year,” adding, “there is enough reason to doubt whether the stock price has risen to an unsustainable level.” The S&P 500 index has broken its all-time high once every three market opening days this year, and the significantly high proportion of the so-called “Magnificent 7 (M7),” a tech-focused index, is also being highlighted. In particular, NVIDIA’s market capitalization has increased by 1 trillion dollars this year alone. The report also acknowledged that “speculative areas, like Bitcoin investors, have increased dramatically.”
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However, due to good corporate performance, the market hesitates to label this as a bubble. Bloomberg reported that according to its calculations, the M7 share prices have been hovering near the average Price Earnings Ratio (PER) since 2015. Scott Chronert of Citigroup said that the net earnings of M7 companies account for about 20% of the S&P 500 index, stating, “You can’t say that the share price is too high compared to their market capitalization, which is about one-third.” He also mentioned, “Just like when internet companies were building related infrastructure in the past, now they are building AI infrastructure. The nature of a company’s performance, including sales to the cash flow that supports it, is completely different.” Bloomberg evaluated that the top 5 stocks of the S&P 500, Microsoft, Apple, NVIDIA, Amazon, and Alphabet, are at half the level compared to the top stocks during the Dot-com bubble in the early 2000s.
Market experts argue that the current stock price rise is distant from “blind investment,” which can be seen in the divergent stock price trends among the M7 stocks. Apple has fallen due to concerns about weak iPhone sales in China. As demand for electric cars decreased, Tesla’s market capitalization was surpassed by pharmaceutical company Eli Lilly, and Alphabet, the parent company of Google, also fell this year. The fact that the market did not respond much to recent Initial Public Offerings (IPOs) supports this.
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There is also a claim that the rally is spreading to all companies in the S&P 500 index. The S&P 500 Equal Weight Index, which views all stocks as having equal value rather than weighting them by market capitalization, hit an all-time high on the 8th. Ed Clissold, chief U.S. strategist at Ned Davis Research, pointed out to MarketWatch, “If only large tech stocks were rising and the rest were falling, the concerns of the bears would be valid, but that’s not the case now.” He added that stocks outside the top 8 in the index are also in a long-term uptrend, and 70% of the stocks in their multi-cap basket are outperforming the 200-day moving average stock price.
Meanwhile, Cathie Wood, CEO of ARK Investment, pointed out that semiconductor stocks could be adjusted as the supply increases. In an interview with Bloomberg Businessweek Radio on the 8th, she said, “It used to take about 8 to 11 months to buy an AI chip from NVIDIA, but now it’s reduced to about 3 to 4 months,” adding, “There might have been double or triple orders when the product was scarce, but I think this situation will be resolved.”
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