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As the Big Seven continue to rise, concerns about stock market concentration have intensified.
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The bursting of the artificial intelligence bubble could cause the stock market to experience a “lost decade” similar to the end of the dot-com boom.
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Richard Bernstein told Business Insider that portfolio diversification is key for investors to avoid losses if the bubble bursts.
The artificial intelligence craze continues to grow, and with it comes concerns about increasing concentration in the stock market.
On Thursday, Nvidia’s fourth-quarter profits added $267 billion to its market value, surpassing Netflix’s total market value and setting a record for its largest single-day gain in history.
As the Big Seven wrap up their latest earnings season, it’s fair to say that the AI industry is in full swing.
Yet with leadership so limited, analysts warn of an AI-driven tech bubble reminiscent of two decades ago. Similar to that period, there are growing warnings that the latest bubble will also burst.
“The important thing to remember is that bubbles always revolve around new technology or new developments. So far, things are a little different… So far… it hasn’t led to widespread new problems,” Richard Byrne writes Richard Bernstein, president of Bernstein Consulting, said in an email to Business Insider.
The bursting of the dot-com bubble ushered in a lost decade for the stock market.
From 1999 to 2009, the S&P 500 returned -1% per year, and the Nasdaq performed even worse, at -5% per year (the Nasdaq 100 returned -6% per year).
“In fact, if someone had bought Nasdaq stock at the peak of the tech bubble in March 2000, it would have taken nearly 14 years to break even,” Richard Bernstein Advisors Zhou wrote in a report.
Fortunately, the Reserve Bank of Australia says there’s a simple solution to avoid the mistakes of the dot-com era: diversification.
“It’s never prudent to shy away from diversification, certainly not in a bubble environment. The key to future returns may be simple, basic diversification.”
Top Six vs Top Seven
The Reserve Bank of Australia pointed out that in 1999, the last year of the technology bubble, the excitement of Internet technology and its potential to revolutionize the economy caused a small number of stocks to rise rapidly. The S&P 500 Information Technology sector had a total return of 103.76% that year.
Meanwhile, “old economy” stocks were left behind by technology stocks, with the S&P 500’s six other major sectors returning an average of 10.7%.
The Reserve Bank of Australia analyzed that many investors believe that today’s “artificial intelligence bubble” is very different from the bubbles of the past few years because large leading companies are “real companies” rather than those with high valuations but little profit. company of.
That’s a misunderstanding, Bernstein said.
As of December 1999, the Big Six tech giants—Microsoft, Cisco, Intel, IBM, Oracle, and Qualcomm—were legitimate companies with solid financials and positive cash flow. But when the bubble burst, none of these stocks quickly recovered to their previous highs. Cisco’s stock price won’t fully recover until 2019.
Today, AI-induced bubbles and pandemic-related excess liquidity have driven up stock valuations, leading to high speculation and concentrated market leadership.
The seven largest stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – currently account for about 29% of the S&P 500. Bernstein said that while some of these companies are showing solid underlying growth, that growth is not exceptional compared to many others.
“There are currently about 140 stocks in the G7 stock markets (US, Canada, Germany, Japan, France, UK and Italy) that are expected to grow earnings by 25% or more next year. Crucially, only 3 of them Only stock Magnificent 7 has surpassed the screen, and the fastest growing among Magnificent 7 is only ranked 25th,” he said in the report.
Diversification is key
Bernstein reiterated that investors must diversify their portfolios to avoid future losses that weighed on their portfolios in the years after the dot-com bubble burst. Fortunately, the RBA believes that a range of solid investments beyond the largest stocks represents a “once in a generation” opportunity.
“If your worldview turns out to be wrong, you’re going to have something that might perform well in unexpected circumstances. So you should always have a backup in your portfolio just in case you’re wrong,” he told Business Insider.
He further distinguished between “economic opportunities” and “investment opportunities.”
“Technology has always changed the economy. My favorite ‘technology’ that changes the economy significantly is the lightbulb because it turns the economy into a 24-hour economy,” he said. “Artificial intelligence will transform the economy, but that doesn’t mean investing in recognized AI stocks today will prove profitable over the long term.”
Read the original article on Business Insider
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