Bubble anxiety belied by weakness in big tech companies, gains in the broader S&P 500 index

(Bloomberg) — The red-hot rally in U.S. stocks heading into 2024 is drawing troubling comparisons to previous boom-and-bust cycles on Wall Street, fueling debate about the risk of the market overheating.

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There's good reason to question whether stocks have advanced at an unsustainable pace: The S&P 500 has closed at record highs 16 times this year, accounting for about a third of all trading days; Nvidia Corp. shares rose. The artificial intelligence darling rose nearly 80%, adding nearly $1 trillion in market cap, even after falling on Friday along with other technology stocks. Speculative areas such as Bitcoin have risen.

However, there are signs that the strength, based largely on the resilience of the economy and strong corporate profits, has not turned into a speculative frenzy.

Many stocks of the so-called Magnificent Seven have tumbled, showing that investors are not throwing their money into the market carelessly. The muted reaction to recent initial public offerings supports this idea. Moreover, the equal-weighted version of the S&P 500 reached a historic high, suggesting that the rally is expanding. Valuations of the largest benchmark stocks are also well below the levels seen for market leaders at the peak of previous market cycles.

Citigroup's Scott Krohnert also points out that the Big 7 technology companies contribute about 20% to the S&P 500's earnings, which he says largely justifies their market cap weight of about a third of the scale.

“There was a premise where you were trying to build Internet infrastructure at the time, just like we're building artificial intelligence now,” Kronert said. “But the nature of corporate revenues and the cash flows that support them is markedly different.”

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Here are some charts that may dispel bubble fears:

Megacap division

The Big Seven — Apple Inc., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc., Microsoft Corp., Nvidia and Tesla Inc. — have moved. — in unison for much of the past year, driving the brunt of the market's gains and until very recently reigning as the S&P 500's largest companies.

The persistent demand for the group's shares has drawn parallels with the speculative frenzy surrounding Internet stocks at the turn of the century.

But the seven diverged in 2024 as investors soured on the outlook for many companies, suggesting the foam around the group may have waned.

Apple's sales have fallen this year, partly due to concerns about iPhone sales in China. The company closed at a record high in December before retreating. As demand for its cars declined, Tesla fared even worse, with its market value falling below Eli Lilly & Co. Sales of Alphabet, Google's parent company, have also declined this year.

More participants

Facing concerns that a handful of stocks were fueling the uptrend, the gains show signs of extending beyond just technology.

The equal-weight S&P 500 index hit a record close last week for the first time in two years. The scale gives an equal share to each component, rather than weighting according to market value.

Shares of S&P 500 stocks rose to all-time highs last month, hitting their highest levels since early 2022, data compiled by Bloomberg Intelligence strategists Gina Martin-Adams and Jillian Wolfe shows.

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However, less than a third of stocks have reached record highs, “leaving plenty of room” for the bull market to gather participants, they said in a note.

In contrast, by the time the tech bubble was about to burst in early 2000, the proportion of stocks at historical levels was dwindling, from about 60% at one point in 1997 to 20% at the turn of the century, the strategists wrote.

IPO Blues

Investors' limited appetite for new listings is another indicator that sentiment is less than the kind of euphoria usually seen around bubbles.

In 1999, about 42% of U.S. IPOs that raised more than $100 million saw their stock prices rise 50% or more during the close of the first day of trading, according to data compiled by Bloomberg. In 2024, only one company – CG Oncology Inc. – These criteria have been met.

The U.S. IPO market raised about $89 billion in 1999. While the market saw record business in 2021, it has been at a standstill since then. There have been 36 IPOs in the US this year, raising $7.2 billion. In 2021, the companies made nearly $300 billion from about 1,000 deals.

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Strong earnings by some tech giants have also pushed down lofty valuations. It is still relatively extended, but still much lower than previous peaks.

Magnificent Seven shares, for example, have been trading near the average price-to-earnings ratio since 2015, data compiled by Bloomberg show.

And get the top five stocks in the S&P 500 today. They trade at less than half the multiples of the biggest stocks in the early 2000s — Intel Corp., Cisco Systems Inc., Microsoft and Dell — a Bloomberg Intelligence analysis shows.

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Valuations are also included across technology stocks in areas including artificial intelligence and robotics, with most of these baskets at or below the five-year average of price-to-sales multiples, according to BI.

–With assistance from Elena Popina, Jessica Minton, and Billy Lipschultz.

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