We are still riding the bubble, specifically NVDA. Here's the introduction to June 18's "Nvidia's Financial Dominance (NVDA)":
For the last year we have been referring to the AI phenomena as a bubble, perhaps not so much in financial terms but rather in terms of the psychology, the speculative frenzy. It's true in Nvidia's case, the stock could be cut in half and still be discounting the future with a 2-3% discount factor i.e. 33 to 50 times free cash flow.
However! Despite this we have been pitching a "Ride the Bubble" approach to the stock for over a year (we have an almost full decade with this one but it was in the last thirteen months that we thought it bubblelicious). Here's a July 1, 2023 post:
....So, we are faced with the decision whether-or-not to play a dangerous little game, riding the bubble knowing full well it is a bubble, or retiring to the sidelines.For now one of our favorite economists with one of our favorite stories.
Here's the version hosted at MIT:
This paper presents a case study of a well-informed investor in the South Sea bubble. We argue that Hoare’s Bank, a fledgling West End London bank, knew that a bubble was in progress and nonetheless invested in the stock: it was profitable to “ride the bubble.” Using a unique dataset on daily trades, we show that this sophisticated investor was not constrained by such institutional factors as restrictions on short sales or agency problems...
The two most important parts of the paper "II. Hoare’s Trading Performance" and "III. Causes of Success" are definitely worth a couple minutes....
NVDA closed the day previous (Friday) to that post at $423.02. Pre-market June 17, the stock is changing hands at a split-adjusted $1317.00.
A couple more examples after the jump but for now two articles that mitigate against the bubble description. First up....
From Business Insider, July 18, 2024:
Tech is overstretched and waning enthusiasm could spark a big correction, SocGen's Albert Edwards said.
The stock market is flashing warning signs as tech shares are a 'valuation timebomb,' SocGen says
- The hype for tech stocks could be approaching an end, according to Albert Edwards.
- The SocGen strategist has been warning of a recession and coming stock crash for months.
- The tech sector is showing a number of signs that valuations are an overstretched "timebomb," he said.
The stock market is flashing warning signs that the tech stock frenzy is about to end, according to one of Wall Street's most bearish analysts.
Albert Edwards, the chief global strategist for Societe Generale, issued another warning about the blistering 2024 stock rally in a note on Thursday. He's been on high alert for a recession and coming stock market crash for months, previously predicting that investors could soon face losses that mirror the dot-com crash in the early 2000s.
"As time marches on, there are few of us left who were in the industry during the 2000 Nasdaq crash let alone the 1987 crash. I was there, and the one thing I have learnt is not to be complacent. Bad stuff happens and the warning signs are there if you look for them," Edwards said in a note on Thursday.
Tech valuations are the big signal that something has to give. The sector has swelled to 35% of the total S&P 500. That's the highest portion tech stocks have accounted for in the benchmark index since the early 2000s, right before the enthusiasm for internet stocks gave way to a massive wipeout in the Nasdaq Composite that took a decade to recover from.
Wall Street still has lofty expectations for tech earnings. Analysts are expecting tech stocks to post forward earnings growth of around 30% year-over-year, Edwards noted, though tech stocks have actually been posting around 20% yearly earnings growth.
Tech earning expectations are growing faster than actual earnings growth. Datastream; SocGen
The earnings gap is quickly becoming apparent to analysts. Earnings-per-share upgrades have fallen sharply for the Nasdaq 100, while upgrades for the S&P 500 and Russell 2000 are on the rise.
Earnings upgrades for the Nasdaq 100 are falling sharply.
Datastream; SocGen
The forward price-to-earnings ratio of the tech sector also looks "stretched," with the sector being priced around 32 times forward earnings estimates. That compares to the S&P 500, where the price-to-earnings ratio is hovering just above 20 — something that points to a "ticking IT valuation timebomb," Edwards said.
"And to what extent is this EPS growth enthusiasm similar to the overinvestment in cabling by the Telecoms industry in the late 1990s, fuelled by 'free' money? We could be about to find out," Edwards wrote. "What might pop this Tech bubble? A simple decline in EPS optimism might do the trick," he later added....
....MORE
If interested see also July 2's "JPMorgan’s Kelly Says Only a Bear-Market ‘Shock’ Can Upend Tech" which concludes with this outro for those who don't have Albert's decades at the market:
When momentum ends it doesn't just stop, it reverses. If interested see July 2021's:
Lest we forget, over five trading days in April 2000 the Nasdaq dropped 25%
However, if memory serves, Amazon was down over 90% on that go-round. I had a friend who made quite a bit of money out of the decline but never bought back in.
The tech dot-com bubble is over there on the left side of the chart, 1998 -2000:
So, as the philosopher asked, "whatcha gonna do?"
