Today’s biggest stocks have more media coverage than white on rice. In May, Tech commentator Scott Galloway wrote in a dissuasive blog post “AI is amazing, but the bubble-multiplier effect is very much in play”. Four months later Oracle’s Larry Ellison defends the hype by telling a story where he and Elon Musk ‘begged’ Nvidia’s Jensen Huang for more GPUs over a sushi dinner.

Whether you believe in the promise of AI or not, tech money is changing hands tens of billions at a time, and all participants’ market valuations corkscrewed higher by trillions.

Is AI/Tech a forever trend, or are new investors buying into the bubble?

Our clients can’t ignore the Nasdaq’s recent dominance. We get 10 questions about tech stocks (Nvidia, Apple, Google, Microsoft, Tesla etc.) for each one about the other 495 members of the S&P 500. Like it or not, tech is the top FOMO trade on Wall Street right now and there isn’t a close second. The big question is whether these stars will continue to grow at the recent rate, and ‘should we buy (or add more) now’?

One analyst reflected on 1999/2000 dot com bubble experience and said that (given 2 choices) he’d rather miss an opportunity than buy at the all-time highs & lose money.

Microsoft is a great example of a company during that tech-wreck that managed to triple it’s earnings from 2000-2010, but the stock was dead money for the entire decade. It didn’t break its 2000 high ($35) again until 2014, because much of that earnings growth was expected and already priced in.

“It is more difficult to stay on top than to get there”

Mia Hamm wrote in her 1999 memoir. Her US Women’s soccer team had just won the World Cup in 1999, and she knew defending a championship was harder than winning one. She was right: the US team didn’t reach the gold medal game in the next two World Cups.

Laws of change don’t just apply to sports: The world’s richest people are still vulnerable to shifting economics and personal circumstances. The Forbes 400 is an annual list of America’s wealthiest, but getting rich and staying rich are two different skills: Forbes noted that 24 people fell off its top 400 list in 2023, 41 in 2022, and 51 in 2021. While annual turnover is 5-10%, decade-long turnover is closer to 20%, for reasons other than death and divorce, which can bring the turnover to 50%.

Stock market leadership has changes constantly.

The largest companies often struggle to keep their growth rates high. For example:

If your company earns $10 billion a year and needs to grow at 20%, you need to earn an additional $2 Billion a year
At $100 Billion, you would need another $20 Billion of Earnings
At a Trillion, you need another $200 Billion of earnings

Growth is often more difficult the larger you get, and usually requires new product lines. Because of this, some of the largest companies struggle to outperform the market. Staying on top is harder than getting there:

Most of the largest companies struggle to beat the market over the ensuing decade, often times posting negative returns. Source: *American Funds “Brave New World” Presentation*

Research Affiliates’ Rob Arnott believes many of today’s Magnificent 7 market leaders are destined for a similar fate of underperformance. He recently quipped:

“Whoever coined the expression ‘Magnificent Seven’ for these companies presumably didn’t see the movie, where four of the seven are dead by the end of the film.”

Whether today’s darlings can continue to grow into their gigantic valuations remains to be seen. And we’re not making any market calls here. We’ve lived through enough cycles to know that predicting stock tops (or bottoms) is a fool’s errand.

But history tells us that diversifying at least some of your new investment dollars into a broad market index might be as wise of a bet as any.