Understanding the market | Wall Street's logic in trading US stocks has undergone a significant change! Why?

The investment frenzy surrounding artificial intelligence (AI) in the market is causing concerns among Wall Street analysts about whether it is triggering a tech stock bubble in the US. Some analysts, drawing on historical references, believe that the current situation in US stocks is vastly different from the "dot-com bubble era." Others are sounding alarms about tech stocks being in a bubble or on the verge of bursting, leading to significant divergence in opinions on whether the US stock market is in a tech stock bubble or a strong bull trend. Citigroup, a major Wall Street firm, recently released a report stating that despite the ongoing debates among investors and analysts on whether AI is creating a bubble and the pros and cons of this bubble for US stocks, it is undeniable that popular tech stocks like Nvidia may still have significant room for valuation expansion.

Christopher Danely, a renowned Wall Street analyst from Citigroup, stated in an investor report, "We must note that a bubble-like market may persist for a year or longer, just like the dot-com bubble at the end of 1999." He added that as long as tech stock valuations continue to rise, a bubble-like tech stock market may even last until 2025.

The market sector most affected by the AI investment frenzy in the US is the semiconductor sector, with stalwart companies like Nvidia (NVDA.US) and AMD (AMD.US) experiencing significant valuation surges. Nvidia's stock price has surged nearly 2000% in the past five years and 266% in the past 12 months, while one of Nvidia's strongest competitors, AMD, has seen its stock price soar by approximately 700% and 109% during the same period.

Danely, the Citigroup analyst, mentioned that although the trend of these tech stocks may cause investment anxiety for some investors who do not hold these stocks due to FOMO (fear of missing out), the overall trend and valuation of popular tech stocks, including these chip giants, are likely to continue to rise.

The current tech stock frenzy has a "fundamental basis"

Similar to the tech stock bubble period from the mid to late 1990s, the stock prices and valuations of tech companies are currently skyrocketing. However, unlike the last decade of the 20th century, the current euphoria surrounding tech stocks is built on some "real foundations," as stated by Citigroup analyst Danely.

In terms of performance, as of the fourth quarter of the 2024 fiscal year ending on January 28, Nvidia's total revenue more than doubled, reaching $22.1 billion. The core business segment of Nvidia, the data center business segment that provides A100/H100 chips for global data centers, saw its Q4 revenue reach around $18.4 billion, a staggering 409% increase year-on-year.

NVIDIA is expected to see a substantial increase in total revenue this quarter, further proving the legitimacy of its soaring stock price and solidifying its position as one of the most valuable companies globally.

In the performance outlook section, NVIDIA stated that the company's total revenue for Q1 of the 2025 fiscal year (ending in April 2024) is expected to reach around $24 billion. This figure significantly surpasses the Wall Street analysts' average forecast of $21.9 billion. The exceptionally strong performance outlook highlights NVIDIA as a prime beneficiary in the global AI trend, positioning it as the "top player" in the AI core infrastructure sector.

Daniel Zhang explained, "This is a rare and exceptional period." He pointed out that the global enterprise AI wave is expanding the potential market for AI chip giants like NVIDIA. He projected in the report that the total potential market for AI chips this year will reach approximately $90 billion, far exceeding last year's figure of around $40 billion.

Some Wall Street analysts predict that this number will see a significant increase in the coming years. A recent research report by Bank of America forecasts that in the next three to five years, the total size of the global AI chip market could reach $250 billion to $500 billion, surpassing the previous expectation of less than $250 billion.

NVIDIA's strongest competitor, AMD, has even more optimistic expectations for the future AI chip market. At the "Advancing AI" conference, AMD, NVIDIA's top rival, raised its global AI chip market size forecast up to 2027 from the previous $150 billion to a staggering $400 billion, while AMD's 2023 AI chip market size forecast was only around $30 billion.

"Considering the growth opportunities in the entire AI market and the 19% decline in semiconductor market sales last year, we believe that semiconductor sector stocks are fundamentally sound for premium trading," said Citi analyst Daniel Zhang.

Zhang expects that tech stock valuations may continue to rise. In the most pessimistic scenario, he anticipates that the extreme overvaluation of tech companies will not see a clear differentiation until the end of 2000, implying that even in the current stock market bubble, there is a very optimistic upside potential.

Micron (MU.US) is Citi analyst Daniel Zhang's top pick in the US semiconductor sector, mainly due to the incredibly strong demand for HBM storage brought about by the surge in AI chip demand. Citi reiterated a "buy" rating on Micron before its earnings announcement and significantly raised the target price from $95 to $150. He also gave buy ratings to AMD (AMD.US), Broadcom (AVGO.US), ADI (AID.US), Microchip (MCHP.US), and ON Semiconductor (ON.US). Jeremy Siegel, a finance professor at the Wharton School, recently stated that with the continuous expansion of the AI bubble, the stock price of AI chip giant NVIDIA may double or even triple if we refer to the stock price trend and overall valuation of Cisco during the Internet bubble period. Siegel said, "If NVIDIA follows the valuation path of Cisco and reaches its peak, the stock price of NVIDIA may double or even triple. It is important to clarify that this is not a prediction of what will happen in the future, but rather an indication of what might happen in a huge bubble."

Will the "1999 Tech Stock Bubble" Repeat Itself? Analysts collectively refute

As the significant rise in the U.S. stock market triggers a comprehensive comparison with past bubble periods, strategists from the international bank Societe Generale believe that the strong performance and signs of the U.S. economy accelerating again indicate that this rise is rational. The team led by Manish Kabra, head of U.S. stock strategy at the bank, wrote in a recent report, "We believe that the current rise is driven more by rational optimism rather than irrational prosperity." The strategists mentioned the "better-than-expected" breadth of corporate earnings, the high point of the new profit cycle, and the improvement in global leading indicators.

Regarding whether the current U.S. tech stocks are already in a bubble, strategists from Societe Generale stated that if we apply various data from the peak of the 1999 Internet bubble, the S&P 500 index would need to rise to at least 6250 points to be comparable to the "tech stock bubble" level of irrational prosperity at that time, compared to the U.S. stock market closing at 5117.09 points last week.

Strategists from Citigroup and Societe Generale, who hold similar optimistic views, believe that the artificial intelligence revolution may have just begun, and it is not a bubble environment like in 1999.

A team led by Dan Ives, a senior analyst at the well-known Wall Street investment firm Wedbush, wrote in a recent research report, "Let's be clear: since the late 1990s, we have been focusing on the technology industry on Wall Street, and this is definitely not a bubble, but the beginning of the fourth industrial revolution led by NVIDIA, which is imminent and will have a significant growth impact on the technology industry led by the ongoing software/use case phase."

"Tech stocks will not show a rocket-like straight upward trend, but will experience digestion periods at certain stages, and as more important data points in the future supply chain and IT spending areas emerge, it will be seen as a healthy process in hindsight," wrote the Wedbush analysis team led by Ives.

Ives' analysis team believes that for an AI monetization market with a future value exceeding $1 trillion, this is just the "top area of the first game," where AI use cases will first touch certain tech companies before attracting widespread attention from consumers. Tech giants such as Apple (AAPL.US), Meta (META.US), Google (GOOGL.US), and Amazon (AMZN.US) have all seen similar impacts and have invested heavily in purchasing NVIDIA GPUs. Their likely goal is to enhance the hardware infrastructure needed for AI applications to be fully consumer-oriented in the future. The Wedbush analysis team led by Evers stated: "It is important to note that expenditures and use cases are changing. Our research and forecast data show that by 2024, overall artificial intelligence spending will account for approximately 8%-10% of enterprise IT budgets, compared to less than 1% by 2023."

The Wedbush analysis team stated that the impact of artificial intelligence on software-based technology companies such as Microsoft, Palantir, Salesforce, ServiceNow, Oracle, MongoDB, and Adobe is just beginning to show, and the full integration of AI technology will help drive developments in other areas, such as companies in the field of cybersecurity, including Zscaler, Crowdstrike, Palo Alto, Varonis, Qualys, Tenable, and Okta.

Keith Lerner, Co-Chief Investment Officer at Truist, wrote that over a three-year period, the performance of S&P 500 technology stocks outperformed the overall S&P 500 index by around 30%. Lerner stated that this is roughly in line with the average level over a 30-year period and significantly lower than the historical peak of slightly over 250% during the internet technology bubble in March 2000.

Data compiled by Bloomberg Intelligence strategists Gina Martin Adams and Gillian Wolff shows that the proportion of stocks at historical highs in the S&P 500 index has increased to its highest level since early 2022. However, the strategists stated in a report, "Even so, less than one-third of stocks are at historical highs, leaving ample room for market participants to join the bull market."

The strategists added that, in contrast, as the internet bubble was about to burst in early 2000, the proportion of stocks at historical highs in the S&P 500 index was declining, from 60% in 1997 to 20% in early 2000. In addition, the S&P 500 equal-weighted index has just reached a historical high, indicating an expanding uptrend, coupled with the fact that the valuations of the largest components of the S&P 500 index are much lower than the valuations of the leaders during previous market cycle peaks.

Concerns about the bubble surrounding the "Magnificent 7," which includes 7 large-cap tech stocks such as Nvidia, are seen by investment firm Ned Davis Research (NDR) as a clear result of market overconcern. NDR stated that supported by strong performance fundamentals and economic fundamentals, the U.S. stock market is showing a "general uptrend" in 2024. NDR stated in the report that, apart from the "Magnificent 7," most stocks in the S&P 500 index are still in a long-term upward trend. Among the large, mid, and small-cap stocks covering various industries that NDR surveyed, nearly 70% of the stocks are trading above the 200-day moving average.

The strong profits of some tech giants have also brought down their previously high valuations. Although valuations are still relatively high, they are far below previous peaks. Data shows that the price-to-earnings ratios of the "Big Seven" in the US stock market are close to the average level since 2015. Taking the five largest components of the S&P 500 index as an example, their price-to-earnings ratios are less than half of the stocks that ranked high in early 2000 - Intel, Cisco, Microsoft, and Dell. Additionally, the valuations of tech stocks in fields like artificial intelligence and robotics have been affected, but most of these tech stocks have price-to-sales ratios at or below the 5-year average level.

According to strategists at Bank of America and Barclays, if there is a "significant pullback" in the US stock market, it may present a good opportunity to buy the S&P 500 index at a low point. Bank of America predicts that the S&P 500 index will reach 5400 points by the end of the year, while Barclays is one of Wall Street's most optimistic investment institutions on the future of the US stock market. The institution has significantly raised its year-end target price for the benchmark index of the US stock market - the S&P 500 index - from 4800 points to 5300 points, mainly due to the expectation that the US stock market will continue to benefit from the robust profit data of large tech companies and the unexpectedly strong performance of the US economy in the market. Barclays also pointed out in the report that if the profit data of large tech companies continues to outperform expectations, the institution believes that the S&P 500 index could potentially reach 6050 points by the end of this year.