Bank of America: The "Seven Giants" of the U.S. stock market are still in a bubble! The upside potential has not yet been exhausted
Bank of America strategists indicate that there is still room for expansion in the bubble of large U.S. tech stocks, and investors should prepare for more upward movement. Research shows that the average increase from the low to the peak of past market bubbles is 244%. Currently, the price-to-earnings ratio of the "seven giants" stock portfolio is 39 times, which is 20% higher than the 200-day moving average, indicating potential for further gains. A positive macroeconomic backdrop and expectations for interest rate cuts by the Federal Reserve also support the tech sector
According to the Zhitong Finance APP, Bank of America strategists have stated that the bubble formed by large U.S. tech stocks over the past two years still has room for further expansion, and investors should prepare for more gains. Led by Michael Hartnett, the Bank of America strategist team studied ten stock market bubbles since the last century and found that the average increase from the low to the peak during these extreme overvaluation periods was 244%. This means that the so-called "Magnificent Seven" stock portfolio, which has risen 223% since the March 2023 low, "still has further upside potential."
Bank of America strategists indicated that the current valuations also support the view that this stock portfolio can rise further. Past stock market bubbles typically ended when the price-to-earnings (P/E) ratio reached 58 times, at which point these stocks were 29% above their 200-day moving average. Currently, the P/E ratios of these seven stocks—Tesla (TSLA.US), Alphabet (GOOGL.US), Apple (AAPL.US), Meta Platforms (META.US), Amazon (AMZN.US), Microsoft (MSFT.US), and NVIDIA (NVDA.US)—are at 39 times, and only 20% above their 200-day moving average. The strategists stated that this makes them the "best representatives of the bubble" today.
Investor enthusiasm for U.S. tech giants has driven U.S. stocks to new highs this year, with no signs of abating. After experiencing shocks from the Chinese AI startup DeepSeek at the beginning of the year and the turmoil caused by the Trump administration's tariff policies, the "Magnificent Seven" quickly rebounded—the S&P 500 Information Technology Index has surged 56% since the April low, and investors have continuously chosen to buy on dips during this period.
A positive macroeconomic backdrop, ongoing enthusiasm surrounding artificial intelligence, and expectations for further interest rate cuts by the Federal Reserve are providing support for the tech sector. In fact, a fund manager survey released by Bank of America this week showed that "going long on the Magnificent Seven" has been considered the "most crowded trade" by 42% of respondents for the second consecutive month.
Bank of America strategists pointed out that bubbles are often short-lived and highly concentrated. Looking back to 2000, when internet-related stocks soared to extreme levels, the tech sector rose 61% within six months, while all other sectors of the S&P 500 index declined that year. Meanwhile, investors should also hedge their exposure to the large tech stock bubble by holding some "distressed value" assets, with potential opportunities currently including stocks in Brazil, the UK, and global energy sectors
