After repelling doubts, can NVIDIA defeat the "Seven Sisters" only through inflation?

The "AI Faith" shines again. NVIDIA, with its outstanding performance in the fourth quarter, single-handedly revitalized the global market, leading to historical highs in European, American, and Japanese stock indices. Technology stocks surged across the board, with the Nasdaq rising nearly 3% overnight to achieve its largest increase in over a year. NVIDIA soared by 16.4%, adding $277 billion to its market value overnight, while Microsoft, Apple, Alphabet-C, Amazon, Meta (Facebook's parent company), and Tesla all closed higher.

However, as inflation fears resurface, how far can the bull market journey of the "Big Seven" go?

Some Wall Street analysts have compared the "Big Seven" to the "Nifty 50" stocks, the top 50 blue-chip stocks in the US market 50 years ago. In the 1970s, severe inflation in the US caused a sharp decline in these stocks, triggering one of the most brutal bear markets since the Great Depression.

Cole Smead, President and Portfolio Manager of Smead Capital Management, believes that the current market environment of the "Big Seven" is reminiscent of the bubble period of the "Nifty 50" stocks in the 1970s. He predicts that the inflation environment in the US will persist, indicating that US stocks may reenact the poor history of 50 years ago.

As inflation resurfaces, tech stocks are more fragile than 50 years ago

On Wednesday, Smead told Business Insider that since the beginning of the 2020s, there has been a significant increase in government fiscal spending in the US, with an expected annual inflation rate of 5%.

Since peaking in 2022, the US inflation rate has remained above 3%, and the labor market continues to show strength, making the Fed's fight against inflation even more challenging. The January US CPI and PPI data were exceptionally strong, indicating that inflation is likely to accelerate again soon.

The intensification of inflation will push up US bond yields, and rising interest rates spell bad news for tech stocks with high valuations. In the 1970s, the Fed's loose policy led to the most severe inflation in US history, followed by a rapid rise in interest rates, causing these highly sought-after stocks to plummet significantly, triggering the most brutal bear market since the Great Depression.

Today, this issue may be even more severe.

In a recent article, Bloomberg strategist Simon White pointed out that compared to 50 years ago, tech companies today have longer durations, making them more susceptible to the impact of rising inflation. Moreover, with more cash flows distributed in the future, the total value of stocks is more easily eroded by higher real interest rates.

Market Concentration Risk Comparable to 50 Years Ago, Once the Expensive "Seven Sisters" Stock Prices Plummet...

Smead stated that although the "Seven Sisters" are recognized as stocks with excellent fundamentals, their valuations are high. For example, Amazon's P/E ratio for 2023 is 59.36, Alphabet-C's P/E ratio is 24.8, NVIDIA's P/E ratio is 275.4, and Microsoft's P/E ratio is 41, far higher than the current P/E ratio of over 20 times for the S&P 500 index.

The valuations of the "Nifty 50" stocks in the 1970s were also very high. According to economist Jeremy Siegel's analysis, in 1972, the average P/E ratio of these stocks was 41.9, while the average P/E ratio of the S&P 500 index was only 18.9.

Taking a lesson from history, Smead pointed out that few leading stocks in the market can maintain the same leading position after ten years.

Among all stocks, only Microsoft has maintained a leading position in the market for decades. In 1999, it was the largest component company by market capitalization in the S&P 500 index, and to this day, it remains one of the largest component companies in the index.

It is worth noting that the top five companies by market capitalization in the S&P 500 index currently account for more than one-fourth of the total market value of the index, compared to only about one-eighth of the index's total market value a decade ago. The concentration of the U.S. stock market is at its highest point in 50 years.

In other words, market concentration risk as high as it is now can only be seen during the bubble period of the "Nifty 50" in the 1970s.

Concerns Abound

In addition to the two analysts mentioned above, other Wall Street star analysts, such as former Chief North American Economist at Merrill Lynch, David Rosenberg, and Chief Market Strategist at J.P. Morgan, Marko Kolanovic, have also begun to compare the current market with the "Nifty 50" stocks of the 1970s and have drawn similar conclusions.

Rosenberg released a report on Wednesday stating that the current "Seven Sisters" are viewed as having good fundamentals like the "Nifty 50" of the past, but excessively high valuations will eventually lead to a bubble.

Kolanovic also pointed out in his report on Wednesday that the current "golden age" economy may eventually turn into the "stagflation" of the 1970s. He mentioned that geopolitical tensions, unsustainable fiscal deficits in the West, and a new wave of inflation are all bearish factors.

Kolanovic mentioned that if a negative feedback loop like the "stagflation" in the 1970s occurs, investors will shift from stocks to fixed-income assets such as bonds. During the period from 1967 to 1980, stocks performed averagely, while bond yields averaged over 7%, clearly outperforming stocks.