Big Tech performance raises questions over whether stock markets are overheating

Yet, there are signs that the strength has not turned into a speculative frenzy

The so-called Magnificent Seven, which include Apple, drove the market’s gains.

US stocks’ torrid climb to start 2024 is evoking worrisome comparisons with past boom-and-bust cycles on Wall Street, sparking debate over the risk that the market is overheating.

There is ample reason to wonder whether shares have advanced at an unsustainable pace: The S&P 500 Index has closed at record highs 16 times this year, accounting for about a third of all trading days; artificial intelligence darling Nvidia has soared nearly 80%, adding roughly $1trn in market value, even after sliding Friday along with other tech shares; and speculative areas such as Bitcoin have surged.

Yet, there are signs that the strength, based in large part on the economy’s resilience and robust corporate earnings, has not turned into a speculative frenzy. Several of the so-called Magnificent Seven stocks have sputtered, showing that investors are not throwing money at the market with abandon. The muted reaction to initial public offerings of late also backs up that notion. 

What is more, an equal-weighted version of the S&P 500 just hit a historic high, indicating the rally is broadening out, and valuations of the benchmark’s biggest stocks are well below levels seen for the market leaders at the height of previous market cycles.

Scott Chronert at Citigroup also notes that the seven megacap tech firms contribute roughly 20% to S&P 500 earnings, which he says largely justifies their market capitalisation weighting of about a third of the gauge. 

“There was a premise where you were trying to build out internet infrastructure back then, much like right now we’re building out AI,” Mr Chronert said. “But the nature of the companies’ revenue and the cash flows that are supporting it are markedly different.”

The Magnificent Seven companies — Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia, and Tesla — moved in unison through much of last year, driving the brunt of the market’s gains and reigning until very recently as the S&P 500’s biggest firms.

The relentless demand for the group’s shares drew parallels to the speculative frenzy surrounding internet stocks at the turn of the century. 

• Bloomberg