JPMorgan Chase: Similarity between the current situation and the 2000 dot-com bubble is much higher than you think

Can the current round of stock market rally driven by a few tech giants in the US continue? JPMorgan Chase warns that there is a risk of a market correction in the seemingly prosperous US stock market, which bears many similarities to the dot-com bubble of the early 21st century.

In a report released today, JPMorgan Chase strategist Khuram Chaudhry and his team conducted research on the valuation and profit trends of two stages, among other factors. They ominously concluded:

Our analysis shows that, although there are obvious differences, their similarities far exceed people's imagination!

JPMorgan Chase: The current market rally relies on a few super-weighted stocks, similar to the dot-com bubble

The dot-com bubble of the early 21st century, similar to the current AI frenzy, had a high concentration of stock market gains. During the peak period, speculation in the capital market was almost crazy, with many companies not truly being internet companies. Many companies even added an "e-" prefix or a ".com" suffix to their names, which caused their stock prices to soar.

In 2023, driven by the AI frenzy, the seven leading tech stocks that led the US stock market had a brilliant year. Apple, Amazon, Alphabet-C, Meta, Microsoft, NVIDIA, and Tesla had an average increase of 112% last year, creating $5.2 trillion in new market value.

However, the concentration of the US stock market is currently at a historical high, with the concentration of the top 100 stocks in the Pro UltrPro Shrt S&Pro 500 index approaching a 30-year high.

As shown in the chart, the weight of the top ten stocks in the overall market is similar to that during the dot-com bubble of the early 21st century.

JPMorgan Chase points out that the valuations of tech giants in the US stock market are too high, and the market rally relies on a few super-weighted stocks. In the face of uncertain macroeconomic factors, once these few stocks experience a significant decline, the market will also be shaken.

Analysts believe that there are four possible scenarios that could lead to a dispersion of market concentration:

1. Market correction: Global stock market sentiment is currently at an extreme level, with stock indices at historical highs. This indicates an increased risk of these indicators reversing, leading to a stock price correction. Given the high concentration of the top ten stocks and investor positioning, these stocks could be greatly affected by a market downturn.

2. Performance decline of super-weighted stocks: Many of the companies in the top 10 are clearly oriented towards cyclical consumption (such as Apple, Amazon, and Tesla) and advertising spending (Meta and Alphabet-C). If the economy starts to slow down in 2024 (as predicted by our economists), the adverse impact on revenue and profits may exceed expectations. In this case, stock prices are likely to react strongly to disappointing earnings, and the top 10 companies may increasingly come under pressure, leading to a decline in the market and concentration levels in 2024. Cyclical Asset Rebound: Currently, our macro navigation tool, the European Quantitative Macro Index (QMI), shows that we are in the "contraction" phase of the cycle. We expect that after the challenges in the first half of 2024, the QMI may enter a recovery phase in the second half of the year. This will benefit cyclical assets such as value stocks, small-cap stocks, and high-risk assets. In this case, the performance of the MSCI USA Index excluding the top ten companies should be significantly better than that of the top ten companies.

Geopolitical Risks and Inflation Reversion: With the ongoing conflicts and regional tensions in the Middle East, the impact of large-scale escalation on shipping, supply chains, and energy prices may lead to an increase in inflation rates, which in turn may prompt central banks worldwide to adopt higher and longer interest rate policies. This will have a negative impact on overvalued stocks, such as the top ten companies.

JPMorgan Chase believes that the current Senior Loan Officer Opinion Survey (SLOOS) in the United States, compared with market concentration, indicates that concentration levels may further increase when financial and credit conditions improve.

The increasingly crowded market also means that the largest weighted stocks and the overall market will face significant risks of a sharp decline:

"The key insight is that an extremely concentrated market will bring significant risks to the stock market in 2024. Just as a limited number of stocks drove most of the gains in the MSCI USA Index, the decline of the top ten stocks will also weigh on the stock market."

Today's tech giants show significantly stronger profitability and cash flow performance than during the dot-com bubble

However, it is worth noting that some analysts believe that today's listed technology companies show significantly stronger profitability and cash flow performance than during the dot-com bubble.

Compared to the pure speculation without EPS support during the dot-com bubble, large technology companies today have mature and stable profit models with high levels of profitability and cash flow.

Analysts from Tianfeng Securities, including Song Xuetao, wrote:

In 2001, the lowest net profit margin of the Nasdaq 100 was only -33.5%, and the entire technology industry suffered a loss of $34.46 billion. The free cash flow of technology companies in 2001 was -$3.7 billion. Compared with the dot-com bubble, today's large technology companies have mature and stable profit models, creating high levels of profitability and cash flow through online advertising and cloud business revenue.

As of March 28, 2023, the profit margin of the Nasdaq 100 reached a high of 12.4%, and although net profit has declined from its peak of $684.5 billion in 2021, it still stands at $503.9 billion. In terms of cash flow, the free cash flow of technology companies in 2022 was $500 billion, and operating cash flow as a percentage of total revenue remained stable at around 20%.

Compared to 2001 when technology companies were still "asking for money" from the market, today's technology companies primarily "give money" to shareholders through buybacks and dividends.