To The Moon

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The US stock market is still being led by those giant tech titans. So far this year, the top seven tech stocks in the US have raked in an 8% return, while the other 493 stocks in the $S&P 500(.SPX)$ are lagging behind at just 3%.

But you know what they say, all good things must come to an end. Are these "Magnificent Seven" in a bubble? Can they keep leading the charge? It's one of the hottest topics among investors right now.

"Magnificent Seven" are $Apple(AAPL)$ $Amazon.com(AMZN)$ $Alphabet(GOOG)$ $Alphabet(GOOGL)$ $Meta Platforms, Inc.(META)$ $Microsoft(MSFT)$ $NVIDIA Corp(NVDA)$ $Tesla Motors(TSLA)$.

Let's start with valuation. These seven tech titans have a P/E ratio of 30, while the rest of the index is sitting at 18. History has shown that to keep winning, these stocks need to deliver results that beat Wall Street's already high expectations. Fortunately, since 2019, their gains have been fueled more by fundamental improvements than just valuation expansion.

The recent earnings season gave these seven stocks a fresh boost of confidence. Out of the six companies that have reported fourth-quarter results, all except Tesla beat sales expectations. Microsoft is the darling of Wall Street thanks to the AI boom, and Meta, which saw its stock price halve in 2022, is back with a vengeance. The trillion-dollar company announced a $50 billion buyback on Friday, sending its shares soaring over 20%.

Looking ahead, analysts at $Goldman Sachs(GS)$ predict that revenue growth will continue to be the key driver of returns for these seven stocks, with sales expected to grow at a compound annual growth rate (CAGR) of 12% through 2026. Compare that to the 3% CAGR expected for the other 493 stocks in the S&P 500.

However, when it comes to individual stocks, the gap in growth expectations is obvious. NVIDIA is expected to grow its annual sales by a whopping 31% over the next three years, compared with 6% for Apple. And things can change quickly too – over the past six months, NVIDIA's sales growth expectations for 2024 have improved by 57%, while Tesla's have been revised downwards by 14%.

Speaking of tech bubbles, the dot-com bubble of 2000 provides some interesting insights. In March 2000, at the height of the bubble, the five largest stocks by market cap – Microsoft, $Cisco(CSCO)$ $General Electric Co(GE)$ $Intel(INTC)$ $Exxon Mobil(XOM)$– accounted for 18% of the index and were expected to grow their sales at a CAGR of 16% over the next two years. In reality, they only managed 8%.

As a result, these stocks underperformed the S&P 500 over the next 24 months. But history doesn't always repeat itself. Compared to those five bubble stocks, today's seven tech titans have a much stronger growth-reinvestment orientation.

Specifically, they reinvest 60% of their operating cash flow back into growth capital expenditures and R&D – more than twice as much as the bubble stocks and roughly three times as much as the other 493 components of the S&P 500.

Finally, when you look at the earnings yield gap, today's seven tech stocks actually look cheaper than those five bubble stocks did back in the day.

So, is there a bubble? Who knows! But one thing's for sure: these seven tech titans are still packing a punch and showing no signs of slowing down. Just don't forget to buckle up and enjoy the ride!