• You put out a report a few weeks ago. You said the signs of a bubble are rapidly increasing valuations, high concentration, and also vendor financing. We're seeing all three. But then you go on to say it's not quite a bubble, at least not yet. So, if we're seeing that already, why isn't it a bubble?
    Frank
  • Peter Oppenheimer
    There's an extent I think that we tend to see those factors playing out. We've had a strong period of returns particularly driven by tech stocks in the US, but that is not related to AI specifically. Tech stocks and the US market driven by them have been outperforming for 15 years underpinned by extremely strong profit growth. So dominance of these large companies in tech has been based on fundamentals not speculation or irrational exuberance about the future. So I think it's really supported by fundamentals so far. Of course that could change as speculation builds but I don't think we're in a bubble at this stage.
  • Valuations are elevated when we talk about the mag 7 and many names but you say they're not technically stretched. How do we know when they're really stretched beyond fundamental basis?
    Frank
  • Peter Oppenheimer
    Bubbles build around narratives that excite investors and companies which pushes valuations to irrational claims on future growth. The five biggest tech stocks represent around 16 to 17% of the global stock market but their valuations, with mid-20s PEs over two years on average, are not at bubble levels like in 2000 when they were around 50. So we've seen performance and concentration, but valuations are high and not extreme, so we're not there yet.
  • Why is everybody so worried about a bubble if there are no clear signs right now?
    Frank
  • Peter Oppenheimer
    Some signs of excitement building could attract more capital and companies and lead to a correction. The Nasdaq was down 20% earlier this year but recovered as fundamentals reasserted themselves. A correction is possible but not a bubble. There's also a massive ramp-up in capex and questions about returns on that capex. History shows technology evolves and other companies can benefit from embedded capex. We're looking for broadening in the market over the next months.
  • Are there other metrics besides earnings for sustainability of this trade?
    Frank
  • Peter Oppenheimer
    Productivity drives tech advances substituting labor. There's a massive ramp in capex but no vast increase in debt or equity financing yet. Past bubbles had huge capital inflows and IPO sprees which we don't see now. Companies fund capex mainly from cash flow. Signs of vendor financing exist but not broad-market exuberance yet. Diversification is playing out with many regions and sectors benefitting.
  • Does it matter if it's a bubble for most index investors?
    Frank
  • Peter Oppenheimer
    It matters because dominant companies form a large part of indexes, with the five biggest tech stocks nearly a quarter of the US index. If they fall, it impacts the broader index. Earlier this year a derating in these companies lowered the broader index. Staying invested with broader exposure across regions and sectors is advisable.
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