A host of similarities between tech stocks now and previous bubbles suggest the Magnificent Seven is nearing — but not yet at — levels that may lead it to pop, according to Bank of America Corp. strategists.
They cite a handful of indicators, such as bond yields, valuations and price action, that suggest there are further gains ahead of the group that includes Apple Inc. and Amazon.com Inc.
Stock-market bubbles often burst due to bond yields adjusted for inflation, which act as a proxy for tight financial conditions, according to the team led by Michael Hartnett. By their math, given all of the debt sloshing around the global financial system, the real yield, which subtracts inflation from the Treasury 10-year yield, would have to reach 2.5% or 3% to end the investor craze for artificial intelligence and megacap tech. At the moment, it’s about 2%.
Valuations are another reason. With a price-earning ratio of 45, the Magnificent Seven group is expensive by any standard. But Hartnett’s research shows that past rallies reached even more extreme levels before hitting a peak, with multiples of 67 for Japanese stocks in 1989 and 65 for the Nasdaq Composite in 2000.
“It ain’t cheap,” Hartnett wrote, “but true that bubble highs have seen dafter valuations.”
Hartnett’s team points out that the gains are smaller than those of other bubbles measured trough-to-peak. Since reaching a low in December 2022, the Magnificent Seven has jumped by about 140%. According to the strategists, the Nasdaq Composite’s surge is not as significant as when it surged by 190% during the Internet bubble or the 230% rally of FAANG stocks from Covid lows.
A skeptical reading of the data might suggest that these are still warning signs for investors hoping to keep riding the rally. And indeed, Hartnett points out that there are “no two bubbles alike.”
The demand for tech stocks has been relentless this year, with Magnificent Seven’s index increasing by almost 12% so far in 2024. And the latest fund flow data shows global investors are adding to their bets.
Hartnett reported that funds focused on tech stocks received around $2.3 billion, citing EPFR data from the week through Feb. 14. In the past four weeks, stock funds have received almost $60 billion, which is the biggest such splurge in two years. Futures contracts on the Nasdaq 100 Index rose 0.5% on Friday.
