Insights From "Nifty Fifty" and Dot-Com Bubble: What's Next for Tech Stocks?
Since the dawn of 2024, the leading U.S. stock indices— $S&P 500 Index(.SPX.US$ and $Dow Jones Industrial Average(.DJI.US$—have continually soared to unprecedented heights, rewriting history with each new peak. The release of $NVIDIA(NVDA.US$'s recent financial report has sparked another surge in tech stocks, weaving together a tapestry of market exhilaration and simmering concerns. This relentless climb has echoes of the past, conjuring memories of the legendary "Nifty Fifty" era and the burst of the Dot-Com Bubble in 2000.
"Nifty Fifty" Is Not Synonymous with a Bubble
The "Nifty Fifty" of the late 1960s and early 1970s—iconic names including $Coca-Cola(KO.US$, Kodak, and $McDonald's(MCD.US$'s—were the darlings of the market, prized for their consistent earnings growth, innovative business models, and apparent invincibility.
However, as the economy softened, inflation rose, and interest rates climbed, the "Nifty Fifty" fell out of favor during the market slump of 1973. Investors began to reassess their growth prospects, questioning their expensive valuations. By the end of 1974, the "Nifty Fifty" had plummeted by over 40%, leading many to declare the bubble burst.
A retrospective glance at the "Nifty Fifty" trajectory reveals that, although valuations for these stocks did soar to great heights, the long-term performance of these companies ultimately justified their premium prices. In his 1998 study titled "Valuing Growth Stocks: Revisiting The Nifty Fifty", economist Jeremy Siegel analyzed 26 years of data from 1972 to 1998 and found that the returns from the fifty companies were in line with the S&P 500 index. Furthermore, their earnings growth rate exceeded that of the S&P 500 by 3% annually, almost perfectly aligning with their high valuations from the early 1970s.
Stocks with persistent earnings growth are often worth far more than the multiple that Wall Street considers "reasonable".
Is There a Bubble in the Current Market?
While future earnings potential is challenging to predict with precision, it is possible to calculate the implied growth rate of a stock's earnings based on its current valuation. Analysis by RIA Advice suggests that the high P/E ratios of the "Mag 7" may not be out of step with the market. A high valuation isn't inherently a red flag; what matters is the ability to achieve the earnings growth commensurate with that valuation.
The table below illustrates the implied future growth rates required for the "Mag 7" to sustain their current valuations. For instance, $NVIDIA(NVDA.US$ would need to achieve a compound annual growth rate of 24.7% over the next decade, while $Apple(AAPL.US$'s required rate stands at 8.67%.
Is There Still Upside Potential for Tech Stocks in the Future?
Goldman Sachs believes there is still room for growth in the current tech bull market without reaching the mania of 1999. The reasons can be summarized as follows:
1. The long-term upward trend of the $NASDAQ 100 Index(.NDX.US$ was initiated by a surge in IT capital expenditures and productivity starting in 1994. Compared to the volatile swings of 1999 and 2000, the current uptrend is much weaker.
2. There is room to re-risk. Even though tech giants remain the most crowded trades, Goldman Sachs strategists Ben Snider and Jenny Ma noted in their report that hedge funds had been reducing their exposure to the "Mag 7" starting in the fourth quarter of 2023.
3. The market is far from bubble valuations. The current P/E ratio for the NASDAQ is at 35 times, significantly lower than the 90 times ratio seen during the late 1990s tech bubble.
Bank of America's conclusion seems to align with Goldman Sachs' sentiment regarding the valuation, particularly within the software industry. The EV/NTM (Enterprise Value to Next Twelve Months' Sales Ratio) of software industry is in line with the 10-year median but below the 5-year median.
Deutsche Bank's research further supports the notion that investment positions in the tech industry, while elevated, have not reached extreme levels. Despite being positioned at the 94th percentile, large-cap growth technology companies are still below their peak in 2021.
Source: Bloomberg, RIA advice, GS, BofA, Deutsch Bank
By Moomoo News Marina
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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