Can this round of U.S. tech indexes** driven by a handful of tech giants be sustainable? JPMorgan Chase warned that there are risks in the seemingly prosperous US stock market right now, and there are many similarities with the dot-com bubble at the beginning of this century.
JPMorgan Chase & Co. strategist Khuram Chaudhry's team examined the two phases of corporate valuations, earnings trends and other elements in a report released today, and they concluded rather ominously:
Our analysis shows that while there are obvious differences, they are far more similar than one might think!The technology bubble at the beginning of this century is similar to today's AI boom, and the concentration of ** increases is quite high. At its peak, the hype in the capital market was almost crazy, and many companies were not really Internet companies, and a large number of companies even added an e- prefix to their names. com suffix, you can make *** grow.
In 2023, driven by the AI boom, the seven major technology stocks that led the rise in U.S. stocks have written a brilliant year. Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla rose by an average of 112% last year, creating a 5A new market capitalization of $2 trillion.
However, the concentration of U.S. stocks** is at an all-time high, with the 100 largest S&P 500 stocks trading near a 30-year high.
As shown in the chart, the weight of the top 10 is similar to that of the dot-com bubble at the beginning of the century.
JPMorgan Chase pointed out that the current valuation of U.S. technology giants is too high, and the increase relies on a few super weighted stocks.
According to analysts, there are four possible scenarios that can lead to a dispersion of concentration:
: Global sentiment is currently at extreme levels, with the index at all-time highs. This suggests an increased risk of a flip in these indicators, leading to the fact that these may be greatly affected by market shrinkage given the high concentration of the top 10 and investor positioning.JPMorgan Chase & Co. believes that the current comparison of the US Senior Loan Executives Survey (SLOOS) with market concentration suggests that concentration levels are likely to rise further when financial and credit conditions improve.Super heavyweight stock performance killingMany of the top 10 companies are clearly geared towards cyclical consumption (e.g., Apple, Amazon, Tesla) and ad spending (Meta, Alphabet), and if the economy starts to slow in 2024 (as our economists say), revenues and profits could be adversely affected more than expected. In this case, there is a good chance that the share price will react violently to the disappointing earnings, and the top 10 companies may come under increasing pressure, leading to a decline in the market and concentration levels in 2024.
Cyclical assets**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 of the first half of 2024, the quantitative macro index may enter a recovery phase in the second half of the year. This will benefit cyclical assets such as value, small-cap stocks, and high-risk assets. In this case, the MSCI US Index, which excludes the top 10 companies, should perform significantly better than the top 10 companies.
Geopolitical risks and inflation return: As conflicts and regional tensions continue to rise in the Middle East, the impact of a massive escalation on shipping, chains, and energy could lead to a pick-up in inflation, leading to higher and longer interest rates by central banks around the world. This, in turn, can adversely affect high valuations**, such as the top 10 companies.
An increasingly crowded market also means that the biggest heavyweights and ** are also at risk of a significant drawdown:
"The key takeaway is that an extremely concentrated market poses a clear risk to 2024**. Just as a very limited number of ** drove most of the gains in the MSCI US Index, the shrinkage in the top 10** dragged it down**.However, it is worth emphasizing that some analysts believe that the profits and cash flow performance of listed technology companies are significantly stronger than during the dot-com bubble.
Compared with the pure hype that was not supported by EPS during the Internet bubble, the current profit model of large technology companies is mature and stable, with high levels of profits and cash flow.
Tianfeng ** analyst Song Xuetao and others wrote:
In 2001, the Nasdaq 100 had the lowest net profit margin of -335%, and the entire tech industry lost 344$600 million. The free cash flow of technology companies was -$3.7 billion in 2001. Compared with the technology bubble, today's large technology companies have a mature and stable profit model, relying on advertising and cloud business revenue to create a high level of profit and cash flow.As of March 28, 2023, the Nasdaq 100 has a profit margin of up to 124%, although the net profit has fallen from the peak of $684.5 billion in 2021, it is still as high as $503.9 billion. In terms of cash flow, the free cash flow of technology companies in 2022 was US$500 billion, and the ratio of cash flow from operating activities to total revenue remained stable at around 20%.
Compared with 2001, when technology companies were still "asking for money" from the market, the current technology companies mainly "send money" to shareholders through buybacks and dividends.