Despite Soft Landing Uncertainty... Nvidia and Magnificent7 Also 'Stirred'

Growing US Economic Uncertainty
AI Leader Nvidia
Surges in After-Hours Trading on Strong Earnings
Expectations to Boost M7 Stock Price

Some Call It the M7 Bubble
Comparing with Past Bubbles

NVIDIA's strong earnings are expected to boost the stock prices of the 'Magnificent 7' (Apple, Microsoft, Google Alphabet, Amazon, NVIDIA, Meta Platforms, Tesla). Despite concerns about a 'bubble' raised by some, analysts emphasize that this phenomenon occurred as the Federal Reserve's (Fed) rate cut timeline was pushed back to June. Typically, the longer a high interest rate environment persists, the greater the downward pressure on tech stocks.

Nasdaq Falls for 3 Consecutive Trading Days... Rebound Expected After NVIDIA Earnings

On the 21st (local time), the stocks of the M7 mostly closed lower due to hawkish remarks from global financial figures favoring tightening. The Fed's January Federal Open Market Committee (FOMC) minutes, which cautioned against too rapid rate cuts and urged careful judgment, appeared to weigh on the market. Following the release of the U.S. January Consumer Price Index (CPI) and Producer Price Index (PPI) showing increased inflation rates, the Nasdaq index fell for three consecutive trading days. Last month's CPI rose 3.1% year-over-year, and PPI increased 0.3% month-over-month, both exceeding market expectations of 2.9% and 0.1%, respectively.

However, the situation reversed after NVIDIA's earnings announcement following market close. Most of the M7 stocks rose in after-hours trading. The Invesco QQQ Trust Series 1 (ticker: QQQ), which tracks the Nasdaq 100 index, rose about 1% in after-hours trading.

Despite growing uncertainty about a soft landing for the U.S. economy, the surge in tech stock prices prompted warnings on Wall Street about preparing for a bubble burst. This is because the market's excessive focus on a few stocks and a single theme recalls the 'dot-com bubble' of the early 2000s.

BoA: M7 Stock Prices Are Not a Bubble

In response, Bank of America (BoA) compared and analyzed past bubble collapses with the price-to-earnings ratio (PER) of the M7 stocks, which have benefited from the commercialization of artificial intelligence (AI). A high PER indicates that a stock is overvalued relative to the company's earnings from business activities.

First, during Japan's bubble economy period from 1986 to 1989, the Nikkei 225 index rose 149% from its lowest to highest point. The highest PER recorded was 67 times, the highest among historical bubbles. During the dot-com bubble from 1998 to 2000, the Nasdaq index similarly rose 192%, with a PER of 65 times. The liquidity-driven COVID-19 bubble from 2020 to 2021 saw the NYSE FANG Plus (+) index jump 229% from low to high, with a peak PER of 60 times.

In contrast, since December 7, 2022, the generative AI boom triggered by ChatGPT has pushed the M7 stocks up 139%, with a peak PER of 45 times. Although M7 stock prices have risen significantly, the increase is relatively modest compared to past bubbles. Michael Hartnett, a strategist at BoA, emphasized, "While the Magnificent 7 bubble is approaching levels where it could burst, similar to previous bubbles, it suggests that it has not reached that point yet."

Besides NVIDIA, other major big tech companies are also expected to increase profits through AI, suggesting further upside potential. Amazon, Meta Platforms, Microsoft, and Alphabet (Google's parent company) are not only NVIDIA's largest customers, accounting for about 40% of its sales, but are also actively working on developing their own AI semiconductors (chips). Bloomberg evaluated, "After NVIDIA's solid outlook reinforced confidence in the AI-driven stock market revival, big tech appears ready for a rebound."

However, caution remains over the excessive upward trend. This is because when NVIDIA rises, related theme stocks also experience significant volatility. When it was confirmed on the 15th that NVIDIA invested in voice recognition AI company SoundHound (SOUN) and AI image processing company Nano-X (NNOX), their stock prices surged 67% and 49%, respectively, on that day. They also rose 4% and 6% in after-hours trading. Emily Rolland and Matt Miskin of John Hancock Investment Management pointed out, "NVIDIA is definitely high quality, but the AI hype has moved beyond reasonable price levels."