Bank of America Hartnett: The valuation bubble of the "Seven Sisters" of U.S. stocks is far from peaking

According to Bank of America’s analysis, the valuation bubble formed among large tech stocks in the U.S. over the past two years has not yet peaked, and there is still room for further gains.

The Bank of America team, led by strategist Michael Hartnett, pointed out in a report that investors should prepare for the continued rise of the "Magnificent Seven" in U.S. stocks. After studying ten major asset bubbles in global capital markets since the last century, the team found that compared to history, the current tech stock boom's valuations and gains have not reached historical peak levels.

The analysis indicates that the current valuation indicators for the "Magnificent Seven," such as price-to-earnings ratios and the deviation of stock prices from key technical moving averages, also support the judgment that there is still upward potential. The strategists believe this makes the group the "best proxy indicator for bubbles today."

This view provides new support for tech stocks that are currently operating at high levels. Since the beginning of this year, investor enthusiasm for U.S. tech giants has remained high, driving major stock indices to set historical highs.

Historical Bubble Comparison: The Rally May Not Be Over

Hartnett and his team's research shows that in the ten major stock market bubbles since the early last century, asset prices rose an average of 244% from the bottom to the peak.

In contrast, the "Magnificent Seven"—Tesla, Google, Apple, Meta, Amazon, Microsoft, and Nvidia—have seen a cumulative increase of 223% since their low in March 2023. Hartnett wrote in the report that this means the group "still has room to rise."

From a valuation perspective, the conclusion holds as well. Historically, when stock market bubbles burst, their trailing price-to-earnings ratios typically reached 58 times, and stock prices were 29% above their 200-day moving average. Currently, the "Magnificent Seven" have a trailing price-to-earnings ratio of 39 times, and stock prices are only 20% above the 200-day moving average.

Market Enthusiasm Remains: AI and Rate Cut Expectations as Boosters

Strong market sentiment and macroeconomic conditions are key factors supporting the continued rise of tech stocks. A positive macroeconomic backdrop, ongoing market enthusiasm for artificial intelligence, and expectations for further rate cuts by the Federal Reserve collectively provide tailwinds for the sector.

Market data also confirms investor enthusiasm. The S&P 500 Information Technology Index has surged 56% since its low in April this year, during which investors have chosen to buy on almost every dip.

Bank of America’s fund manager survey released this week shows that "going long on the 'Magnificent Seven'" has been viewed as the most crowded trade for the second consecutive month, with 42% of respondents agreeing This trend of high concentration also aligns with the characteristics of historical bubbles.

The Hartnett team pointed out that bubbles are often short-lived and highly concentrated. For example, during the peak of the internet bubble in 2000, the technology sector soared 61% within six months, while all other sectors of the S&P 500 recorded declines that year.

Despite being optimistic about the continuation of the technology stock bubble, Hartnett advises investors to adopt a more balanced strategy to manage risk. He noted that as the bubble expands, this extreme valuation surge will also stimulate overall economic growth, thereby creating opportunities for other assets.

Therefore, Bank of America's strategists recommend that investors adopt a "barbell" strategy, which involves holding large technology stocks while also allocating some to "bad value stocks."