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Simon Brown: I'm currently chatting with Sean Kelly from Parity Wealth Managers. Sean, thank you for your early morning. The question you pose is, “Are we in a tech bubble?” So I'm watching The Magnificent Seven. Apple is under pressure, and so is Tesla. Of course, other companies in this group are still in business, such as Nvidia and Microsoft. What's your taste? Is this the tech bubble we're seeing, especially with the Magnificent Seven, but perhaps even more broadly?
Sean Kelly: Thank you, Simon. It's great to be a part of it. We think there are obviously many reasons why people call this a bubble. Looking at it, in the second quarter of 2023, 177 S&P 500 companies mentioned AI in their earnings calls. This was almost triple his five-year average. Furthermore, the stock prices of companies that mentioned AI rose by an average of 13%, while the stock prices of companies that did not mention AI rose by just 1.5%.
Unsurprisingly, some market participants believe we are currently in a tech bubble, much like the dot-com bubble of 2000, with companies increasingly reluctant to advertise or mention their AI capabilities. points out that it is similar to the tech boom of the 1990s, when simple investments led to huge increases in stock prices. Include “.com” in the name.
However, we believe there are some differences from the dot-com bubble of 2000. For example, the appraised value will be lower. The Nasdaq 100 currently trades at a forward price/earnings ratio of 26 times, compared to 60 times in 2000. Of course, a lower valuation indicates that investors are naturally more focused on earnings, which means there is less risk of the stock being overvalued.
Second, during the dot-com bubble, flows to equity funds increased dramatically, increasing by about 76% from 1999 to 2000. In contrast, his net flows in ETFs and mutual stocks over the past two years have actually declined. In 2022, there were net outflows of $54 billion, rising to $137 billion in 2023.
As a result, investors appear to be even more hesitant. This is a little different from the dotcom bubble.
Simon Brown: I understand your opinion. I remember it – I can't remember what the stock was, but it was some kind of random retailer who had launched a website. The website was literally a picture of the company's headquarters, but with “.com” attached. Because it was on the internet, the stock price rose 30% the next day.
This is exactly what AI and artificial intelligence is about, and in many ways it is real. But as you point out, a lot of companies are jumping on that bandwagon and increasing their stock prices in a lot of other ways.
Sean Kelly: that's right. But there was clearly a great deal of concentration. As you pointed out, MagSeven is at the center of this AI. The market capitalization of these companies now stands at $13.2 trillion, roughly 31.5 times South Africa's GDP. It accounts for 30% of the S&P 500. Starting in 2022, I believe the median return of the S&P 493 minus Mag7 was about 13% below the actual S&P return of 35%.
But participants aren't just concerned about the fact that these seven companies have returned an average of 154% in the last year. It's the fact that their stock prices are still skyrocketing. Nvidia, which rose 240% last year, is up 84% this year alone. To give you a little context, this increased the company's market cap by $754 billion. That's more than the market capitalization of the 72 smallest companies listed on the S&P 500.
It's a similar story in the meta, which was up 194% last year and 43% this year. Amazon is up 81% last year and about 16% this year. So the tech bubble is fundamentally caused or based on this AI concept or the Fourth Industrial Revolution, which is a big factor driving speculative investment and in turn driving up valuations in the tech sector.
Simon Brown: So this is not necessarily the bubble of 2000. I agree with you on that point. However, to put it politely, there are certainly some “expensive” reviews. Has this bubble burst, or will stock prices level off and lead to a kind of easing? [from] Aren't your numbers what we're seeing? What's the next move here?
Sean Kelly: Yes, that's the question. In fact, I think AI is poised for tremendous growth in the future. AI can be incorporated into basically every aspect of the economy, especially in areas like cybersecurity, pharmaceuticals, and more. What we've seen so far is that AI naturally requires data, and the more the better. And this has limited the number of AI players dominating the supply side, as by this stage large profits have accrued to the largest data aggregators.
In fact, more and more companies are buying or collecting data to keep up with the Magnificent Seven. So, to your point, the bigger question we need to ask is not necessarily whether we're in a tech bubble, but whether these seven companies will be the only ones to benefit from AI. Or will other companies compete and steal the space? From your current competitive advantage.
But as Warren Buffett points out, it's only when the tide goes out that we find out who was swimming naked.
Simon Brown: One hundred percent. I like that. We focus on the Magnificent Seven. Sure, they do a lot, some more than others. But what about others? There must be others. It certainly took off after his IPO last year.
Thank you so much to Sean Kelly of Parity Wealth Managers for your valuable insights this early morning.
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