The Nvidia and Magnificent 7 Bubble Could Pop

The major driver has been new opportunities for artificial intelligence as the technology shifts from Google’s large language model “Gemini,” to new and advanced cloud-computing capabilities. Investors see more market opportunity for the technology behemoths. Analysts have increased their profit forecasts for the Seven companies, driving the stocks higher. 

Now, the group looks too hot—and evidence is building that the Seven is in a bubble that’s starting to burst. 

The first piece of evidence is that the share-price gains are on par with those seen in other bubbles. The “FAANG stocks”—a predecessor group to the Seven—in aggregate, rocketed 229% by 2021 from their lows, before falling 49%, according to Bank of America. Before that, dot-com stocks soared 192% by 2000, and then plunged 73%. 

The next question is when these parties tend to end. Nine out of 14 bubbles that BofA studied burst after less than two years of declines. So far for the Seven, the run has lasted just over a year, so they could falter soon.

To that point, so much money has recently rushed into the seven stocks that not much more can move in. Just over a net $10 billion has flown into tech stock funds this so far year alone, putting the inflow on pace to hit $84 billion for the entire year. That would be a record, and about double last year’s $44 billion inflow.

That might indicate a lack of new buyers of tech stocks in the near future, since everyone interested in the sector has already bought in, and doesn’t need to take any additional risk. Already, tech stocks have retreated from recent peaks, with Nvidia down about 7%. The catalyst has been last week’s higher-than-expected inflation result, which has driven long-dated bond yields upward. Higher long-dated bond yields make future profits less valuable—and investors value these tech companies with the idea that a bulk of their profits will come many years in the future. 

So BofA is calling the AI-hype rally a “baby bubble.” 

That’s a reason not to buy these stocks right now. But one solid strategy is waiting to buy into any massive drop. 

Now for part two—the long-term bull case for the Seven and affiliated tech stocks. 

The fact is that the AI opportunity is real, and tech earnings are likely to continue growing rapidly for years. Total AI spending can grow at almost 20% annually through 2032 to just over $2.5 trillion by 2032, according to Precedence Research. That would mean similar, or even higher, growth in earnings for companies leading the innovation curve. At some point, their cost increases will moderate, profit margins will stabilize or increase, and these cash-rich firms will buy back stock. 

History backs up the growth-curve potential. Innovations such as cellphones, the internet, computers, and others grew by a double-digit percentage annually for more than 10 years, according to Trivariate Research.

That’s why many are looking to “buy it [the group of stocks] for the second leg of success that invariably happens in most technology adoption curves,” wrote Trivariate’s Adam Parker. 

First a correction, then a long-term bull run for these tech stocks. 

Write to Jacob Sonenshine at [email protected]