Many Wall Street analysts are panicking about whether the market's investment frenzy surrounding artificial intelligence (AI) is triggering a bubble in US stocks: some analysts cite classical evidence and think that the current US stock market is completely different from the “Internet bubble period”; others have already gone through the sky. All in all, they are quite divided on whether the US stock market is in a bubble or is about to burst. Wall Street giant Citi recently released a report saying that although investors and analysts have recently frequently debated whether artificial intelligence has brought about a bubble and the advantages and disadvantages of the bubble for US stocks, it is undeniable that the valuations of popular technology stocks such as Nvidia may still have a lot of room for expansion.

Christopher Danely (Christopher Danely), a well-known Wall Street analyst from Citi, wrote in an investor report: “What we must be aware of is that a bubble-like market may continue for a year or more, just like the Internet tech bubble at the end of 1999.” He added that as long as tech stock valuations continue to rise, the bubble-like tech stock market may even continue until 2025.

The market sector most affected by the AI investment frenzy is the US semiconductor sector. The valuations of “AI backbone companies” such as Nvidia (NVDA.US) and AMD (AMD.US) have recently jumped sharply. Nvidia's stock price has “skyrocketed” by nearly 2000% in the past five years, and has risen sharply by 266% in the past 12 months. Over the same period, the stock price of AMD, one of Nvidia's strongest competitors, soared by about 700% and 109%, respectively.

Citibank analyst Daniel said that although the trend of such technology stocks may make some investors who do not hold these stocks feel investment anxiety due to FOMO (fear of missing out), the overall trend and valuation probability of popular technology stocks, including these chip giants, will continue to rise.

This wave of surging technology stocks has a “fundamental foundation”

Just like during the tech stock bubble in the mid-90s of the last century, the stock prices and valuations of technology companies are also currently rapidly soaring. However, unlike the last decade of the last century, the current fanaticism surrounding technology stocks is based on some “real foundations,” Citibank analyst Danieli said.

In terms of performance, in the fourth quarter of fiscal year 2024 ending January 28, Nvidia's total revenue more than tripled to reach US$22.1 billion. Nvidia's core business division, the data center business division, which provides A100/H100 chips for data centers around the world. The Q4 revenue scale reached about US$18.4 billion, a sharp increase of 409% over the previous year.

More importantly, Nvidia expects another sharp increase in total revenue this quarter, which helps to fully justify the sharp rise in its share price and continue to be one of the most valuable companies in the world.

In its performance outlook section, Nvidia said that the company's total revenue for the 2025 fiscal year Q1 (ending April 2024) will reach approximately US$24 billion. This figure can be described as significantly exceeding the average forecast of Wall Street analysts of $21.9 billion. This strong performance outlook highlights Nvidia's ranking as the best beneficiary of the AI boom in global corporate layout, and can be called the “strongest seller” in the field of AI core infrastructure.

“This is one of those rare and unique times,” Danieli explained. He pointed out that the wave of global enterprise artificial intelligence is expanding the potential market for AI chip giants such as Nvidia. In his report, he predicts that the total potential market for AI chips will reach about 90 billion US dollars this year, far higher than about 40 billion US dollars last year.

Some Wall Street analysts predict that number will rise significantly over the next few years. A recent research report released by Bank of America predicts that in the next three to five years, the total size of the global AI chip market may reach 250 billion US dollars to 500 billion US dollars, higher than the previous forecast of less than 250 billion US dollars.

Nvidia's strongest competitor, AMD, is more optimistic about the future AI chip market. At the “Promising AI” press conference, Nvidia's strongest competitor AMD abruptly raised the global AI chip market forecast up to 2027 from 150 billion US dollars to 400 billion US dollars, while the AI chip market size forecast given by AMD in 2023 was only about 30 billion US dollars.

“Considering the growth opportunities of the AI market as a whole and the semiconductor market's sales drop of about 19% last year, we expect premium trading in the semiconductor sector to have a fundamental basis.” Citibank analyst Danieli said.

Danieli anticipates that tech stock valuations may continue to rise. In the most pessimistic situation, he predicts that the extreme overvaluation of technology companies “will not show a clear divergence until the end of 2000,” which suggests that even if the US stocks are currently in a bubble, there is very optimistic room for growth.

Micron (MU.US) is Citibank analyst Daniel's preferred target in the US semiconductor sector, mainly because the company has benefited from the extremely strong demand for HBM storage brought about by the surge in demand for AI chips. Citi reaffirmed its “buy” rating for Micron before announcing its results, and raised the target price sharply from $95 to $150. He also gave AMD (AMD.US), Broadcom (AVGO.US), ADI (AID.US), Microchip (MCHP.US), and Onsemi Semiconductors (ON.US) purchase ratings.

Jeremy Siegel (Jeremy Siegel), a finance professor at Wharton School of Business, recently said that if we refer to Cisco's stock price trend and overall valuation during the Internet bubble, the stock price of AI chip giant Nvidia may rise one to three times more as the AI bubble continues to expand. Siegel said, “If Nvidia follows Cisco's valuation path and reaches a peak, Nvidia's stock price may rise one to three times more. To be clear, this isn't my prediction of what will happen in the future; I'm just trying to indicate what might happen in a huge bubble.

Will the “1999 tech stock bubble” be repeated? Analysts collectively refute

As the sharp rise in US stocks triggered a comprehensive comparison with the bubble period in the past, strategists at the major international bank Société Générale said that strong performance and signs of a renewed acceleration in the US economy suggest that this rise is reasonable. A team led by Manish Kabra (Manish Kabra), the bank's head of US stock strategy, wrote in a report released recently: “We believe the current rise is more driven by rational optimism than irrational prosperity.” The strategist mentioned the breadth of “better-than-expected” corporate profits, the high point of the new profit cycle, and the improvement in leading global indicators.

Regarding whether US technology stocks are currently in a bubble, Societe Generale's strategists said that if various data from the peak of the 1999 internet bubble were applied, the S&P 500 index would need to rise to at least 6,250 points to be compared to the level of the “tech stock bubble” of the irrational boom cycle at the time. In contrast, US stocks closed at 5117.09 points last week.

Strategists with similar optimism to Citibank and Societe Generale think that the AI revolution may have just begun, and now it is not a bubble like in 1999.

A team led by Dan Ives (Dan Ives), a senior analyst at Wedbush, a well-known Wall Street investment agency, recently wrote in a research report: “Let's first be clear: we've been watching the Wall Street tech industry since the late 90s. This is definitely not a bubble, but the beginning of the fourth industrial revolution led by Nvidia, which is now imminent. It will have a significant growth impact on the technology industry led by the ongoing software/use case phase.”

“Technology stocks will not show a rocket-like upward trend. Instead, they will go through a digestion period at some stage, and as there are more and more important data points in the field of supply chains and IT spending in the future, we will find that this is a healthy process.” The Wedbush analytics team led by Ives wrote.

The analysis team led by Ives believes that for an AI monetization market with a future value of more than 1 trillion US dollars, this is only the “top area of the first game”. AI use cases will first touch certain technology companies, then the high-profile consumer side. Tech giants such as Apple (AAPL.US), Facebook parent company Meta (META.US), Google (GOOGL.US), and Amazon (AMZN.US) have all seen similar influence. They are likely to spend huge sums of money to buy Nvidia GPUs. The goal is to improve the hardware infrastructure required for AI applications to be fully consumer-facing in the future at this stage.

The Wedbush analytics team led by Ives wrote: “Importantly, spending and use cases are changing. Our research and forecast data show that by 2024, overall AI spending will account for about 8%-10% of the enterprise IT budget, and by 2023, this ratio will be less than 1%.

The Wedbush analysis team said that the impact of artificial intelligence on software-based technology companies such as Microsoft, Palantir, Salesforce, ServiceNow, Oracle (Oracle), MongoDB, and Adobe has only just “begun to show,” and that full integration with AI technology will help drive development in other fields, such as companies in the cybersecurity sector, including Zscaler, Crowdstrike, Palo Alto, Varonis, Qualys, Tenable and Okta.

Keith Lerner (Keith Lerner), co-chief investment officer at Truist, wrote that with a time span of three years, the performance of S&P 500 technology stocks was about 30% higher than the overall S&P 500 index. Lerner said that this is roughly in line with the 30-year average, and is far below the historical peak of slightly above 250% during the Internet tech bubble in March 2000.

According to data compiled by Bloomberg Intelligence strategists Gina Martin Adams and Gillian Wolff, the share of historically high stocks in the S&P 500 index has risen, reaching the highest level since the beginning of 2022. But the strategist said in a report: “Even so, less than one-third of stocks are at historic highs, which leaves plenty of room for the bull market to attract participants.”

In contrast, when the internet bubble was about to burst in early 2000, the share of historically high stocks in the S&P 500 index was declining, from 60% in 1997 to 20% in early 2000. Furthermore, weighted indices such as the S&P 500 have just reached historic highs, indicating that the gains are expanding. In addition, the valuation of the largest constituent stocks in the S&P 500 index is also far below the valuation level of previous leaders during peak market cycles.

Concerns about the “Magnificent 7” bubble, which covers 7 major US tech stocks including Nvidia, are clearly the result of excessive market concerns, according to investment agency Ned Davis Research (NDR). NDR said that with strong performance fundamentals and economic fundamentals, US stocks showed a “general upward trend” in 2024.

NDR said in the report that with the exception of “Magnificent 7,” most stocks in the S&P 500 index are still on a long-term upward trend. Of the large, medium, and small-cap stocks from all walks of life covered by NDR, nearly 70% of the stock trading prices are above the 200-day moving average.

Strong profits from some tech giants have also lowered their already extremely high valuations. Although the valuation is still relatively high, it is far below its previous peak. According to the data, the price-earnings ratio of the “Big Seven” US stocks is close to the average since 2015. Take the five largest constituent stocks in the S&P 500 index. Their price-earnings ratio is less than half that of the top stocks in early 2000 — Intel, Cisco, Microsoft, and Dell. Furthermore, the valuations of technology stocks in fields such as artificial intelligence and robotics have also been affected, but the market-sales rate of most of these technology stocks is at or below the 5-year average.

According to Bank of America and Barclays Bank strategists, if there is an “obvious correction” in US stocks, it may be a good opportunity to buy the S&P 500 index on dips. Bank of America expects the S&P 500 index to reach 5,400 points by the end of the year. Barclays Bank can be described as Wall Street's most optimistic investment institution for the future market of US stocks. The agency's year-end target price for the US stock benchmark index, the S&P 500 index, was raised sharply from 4,800 points to 5,300 points, mainly because it is expected that US stocks will continue to benefit from the rich profit data of large technology companies and the excellent performance of the US economy beyond the expectations of the market. Barclays also pointed out in the report that if the profit data of large technology companies continues to exceed expectations, then the agency believes that the S&P 500 index may reach 6050 points by the end of this year.

Editor/Somer