Biggest Black Swan in 2024? Analyst Warns of Tech Bubble Popping as Magnificent 7 Market Cap Exceeds $12 Trillion
In 2023, the AI craze triggered by ChatGPT stimulated U.S. technology stocks, which had been plagued by missed earnings and rising bond yields in 2022. The FOMO (fear of missing out) sentiment surpassed concerns about economic recession and interest rate levels not seen in 22 years on several occasions. The Magnificent Seven, led by $NVIDIA (NVDA.US)$, made remarkable progress that year, hitting record highs and contributing to the impressive performance of the entire US stock market.
As of last Friday's close, the combined market capitalization of Magnificent 7 had exceeded $12 trillion. While institutional and retail investors eagerly anticipated further success for technology stocks, Albert Edwards, Global Strategist at Societe General, sounded a warning bell. He warned that the biggest black swan event in 2024 might be the bursting of the US technology bubble, could even drag the entire US market into a recession.
Societe Generale has pointed out an important risk in the stock market - over-concentration. Recent data indicates that U.S. technology stocks now make up almost one-third of the U.S. market value, double what they were five years ago. This issue was also highlighted in Societe Generale's November study, which found that the top 10 performing stocks in the S&P 500 accounted for approximately 89% of the index's total return as of early November.Over-concentration in market capitalization leads to over-concentration in market bets, making any risk event more likely to trigger a larger-scale stampede.
Another significant risk worth noting is at the valuation level. Recent data indicates that the forward PE of the $Nasdaq Composite Index (.IXIC.US)$ in the next 12 months is around 25 times, significantly higher than the 20-year average level of 19 times. Furthermore, Albert Edwards has pointed out that the current 12-month forward PE of the technology industry is 27 times, which is substantially higher than the overall market valuation level of less than 20 times. Edwards has warned that this valuation premium is the highest ever recorded outside of the Nasdaq bubble of 2000.
Furthermore, several technical indicators such as the CNN Fear and Greed Index, put/call ratio, and VIX index also indicate the current overheating status of U.S. stocks.
1. CNN Fear and Greed Index
As of December 22, the CNN Fear and Greed Index had reached 76.80, the highest level in history, indicating that the market is still exhibiting signs of greed.
2. Put/Call Ratio
Since reaching a periodic peak of 1.18 on October 5th, the CBOE put/call option ratio (10-day MA) has persistently declined over the past two months, with the latest reading as of December 22nd standing at 0.91. Based on historical trends, a further drop below the 0.8 level could potentially indicate that the market has reached its peak.
3. VIX
With the Federal Reserve approaching a rate cut, investor risk appetite continues to increase. The latest $CBOE Volatility S&P 500 Index (.VIX.US)$ shows a level of around 13, which is significantly lower than the historical long-term average of 20. Over the past five years, the VIX has been at or below its current low level for less than 3% of the time, indicating that financial markets are exhibiting less caution.
4. US Investor Sentiment, % Bull-Bear Spread
The latest AAII Sentiment Survey shows that the Bull-Bear Spread of retail investors has reached 32%, which is rapidly approaching the high seen in April 2021.
In contrast to the pessimistic tone of Societe Generale, some major Wall Street banks remain confident in technology stocks. According to analysts at Morgan Stanley, further investments in technology companies by investors may continue to fuel the rally in U.S. stocks next year. The outstanding profitability of these companies combined with the possibility of repurchase behavior are expected to support the continued growth of the " Magnificent 7" in 2024.
Source: Societe Generale, macromicro, moomoo, ycharts
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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independent Bat_6597 : Technology is growing and will continue in the future
NgKevin : if tech bubble I will buy more and just ignore the short term up and downs
151345481 : If the seven majestic wonders are called bubbles, then the development of humans to the present day is a huge bubble for primitive people in the Stone Age. Once bursting, it will return to the Stone Age. This is the ridiculous logic of some economists.
bullrider_21 NgKevin : Don't forget that when the Dot.com tech bubble burst in 2000, it took 15 years for Nasdaq to rise back to its all-time high.
NgKevin : That’s why margin of safety is very important
HUXB2020 : A lot of OTC capital is waiting to fall and increase positions
digimonX : Albert Edwards of Societe General is said to be "famed for his constant pessimism" according to this article (https://www.afr.com/markets/equity-markets/echoes-of-1987-crash-socgen-s-edwards-20231004-p5e9j8). Just 2 months ago, he wrote a bearish piece about recession coming in 2024 due to "economic uncertainty". Now that the Fed's direction is certain, his story changed to "bursting of US technology bubble" due to over-concentration in Magnificent 7... Bloody anal-yst.
frank Crane_3546 digimonX : There will not be a bursting of the technology sector but ratha rotational switch to interest sensitive stocks like Tesla & small cap stocks! Never listen to prrma bears who lost billions! Let there be a SHORT squeeze! More losses to the hedge funds that sell shorts!
frank Crane_3546 digimonX : He has a dark agenda! May this perma bear lose more billions! This is the start of a slow sustained bull mkt! Remember next year is an election year! May the bears shortists lose more billions!!!
Suston Capital bullrider_21 : At that time, most of the PE of Internet companies was over 100 times; now the M7 dynamic PE is only 20 times greater. Growth in the next ten years is certain, and mechanical comparison is not possible
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