Since October 2022, the American stock market has increased by more than 60%. An impressive increase which is mainly explained by the performance of the magnificent 7. Some stocks whose dominant position allows them to display unprecedented profitability. The next few years will be key, as the development of AI requires colossal investments.
Are we in a bubble? This is the question that any bull market worthy of the name asks. A vertigo of the summits which leads to questions. The current period has all the characteristics of a bubble: significant rise in indices, significant expansion of multiples, and of course technological revolution which will change the world (artificial intelligence). Each time, an over-anticipation of the growth and consequences of new technologies. Each time, entrepreneurs, analysts and managers explain that this time it is different. A phrase that normally sounds like a red flag. What if this time it was really different?
Since the October 2022 low point, the S&P 500 has gained more than 60%. 7 stocks made most of the increase: Apple, Meta, Microsoft, Amazon, Alphabet, Nvidia and Tesla. This group, commonly called the Magnificent 7 (or Mag Seven for short), has been driving the American market for even longer since it has posted a performance of more than 50% in 6 of the last 8 years.
Performances which cause these values to gain more weight in the indices each year. These 7 companies today represent 35% of the capitalization of the S&P 500. A concentration in the indices which responds to a concentration of profits.
Source : JP Morgan Asset Management
Cash machines…
Tesla aside, these companies are cash machines. In 2025, Apple, Alphabet, Microsoft, Amazon, Nvidia and Meta are expected to generate 472 billion in free cash flow. To quote an analyst whose name I haven’t remembered: “free cash flow never lies”. And it is this profit capacity that must be compared to the rich valuation (forward P/E of 33, excluding Tesla). Here again, this handful of companies with high multiples largely explains the high valuation of American indices. A rich but not excessive valuation.
Especially since growth is there. Despite a market capitalization of between 1.4 and 4 trillion dollars (let’s take a little more effort Apple), the profit growth of the Magnificent 7 expected in 2025 (+21.3%) is higher than that of the 493 other stocks in the S&P 500 (+13%). The example of Nvidia is striking. While the champion of AI chips already weighs more than 3 trillion on the stock market, earnings per share should still increase by 138% next year, after 586% this year. All with indecent margins (61% EBIT margin), symbols of Nvidia’s domination of its market.
Source : Factset
…and investment wall
This level of profitability is, in theory, not sustainable over time. On the one hand, because it is the result of quasi-monopoly situations. However, monopolies are harmful to the entire economy. Sooner or later regulators will have to dismantle them. On the other hand, abnormally high profits cause other firms to enter a market. Ultimately, competition must standardize them.
This is all theoretical. In reality, the United States is not going to dismantle its technological champions to leave the door open to their Chinese competitors. And Nvidia’s stratospheric margins are linked to a technological advance that is very difficult for its competitors to catch up with.
With just over $250 billion in Capex (investment spending) planned for 2025 and even more for the following years, the tech giants have no room for error. The challenge for the years to come will be the monetization of AI solutions. A “make or break moment” for the most profitable companies in history. No one can say we are in a bubble until it bursts. But if we’re in a bubble, it’s a profit bubble.
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