Since last year, under the explosion and concept hype of generative AI, technology giants in the US stock market, led by Nvidia and Microsoft, have risen strongly and supported further gains in the US stock market. Data shows that the seven largest companies in the US stock market in 2023- Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta, and Tesla - contributed two-thirds of the gains to the S&P 500 index.
At the beginning of this month, the total market value of the "Big Seven" in the US stock market reached $12.5 trillion, which is the total market value of the stock markets of Japan, France, and the United Kingdom. Among them, Nvidia, with its absolute dominance in the underlying infrastructure of generative AI - computing chips, has continued to rise since the beginning of 2024. Its market value even surpassed Amazon and Google this week, becoming the third largest listed company in the US stock market.
However, behind the rapid growth of the "seven giants" in the US stock market, is the valuation reasonable and is there any risk in continuing to invest? In response to this, Daniel Ives, Managing Director and Senior Stock Analyst of Wedbush, pointed out in an email to a reporter from the Daily Economic News that "although bears are still concerned about the valuation of such AI technology companies, we believe that as AI spending continues to grow, Wall Street's financial report data (and valuation) for fiscal years 2024 to 2025 will continue to rise.". All of this is due to the explosive growth of AI practical applications, which will drive technology transformation led by software and chips, and continue until 2024 and beyond
The market value of the "seven giants" in the US stock market=the total stock markets of Japan, France, and the UK
The latest monthly global fund manager survey by Bank of America shows that almost everyone on Wall Street is buying into the "Big Seven". In the survey, 61% of fund managers surveyed believe that long selling on the "Big Seven" US stocks is currently the most crowded trading activity. The proportion of fund managers who hold this view far exceeds the survey results from December last year and January this year.
For the leaders of the US stock market, 41% of surveyed managers believe it is the growth of large cap stocks. 18% of respondents believe it is growth in small cap stocks.
Bank of America
In fact, it is not surprising that funds are rushing towards these "seven giants" - these seven companies contributed a 45% increase to the S&P 500 index throughout January, with a total market value of $12.5 trillion at the beginning of this month, exceeding the GDP of international metropolises such as Tokyo and New York, and even equivalent to the combined market value of the stock markets of Japan, France, and the United Kingdom.
It is not difficult to find that the increase in market value of the "Seven Giants" is more or less related to the outbreak of generative AI. Except for Nvidia, the leading AI company, cloud service provider Microsoft, Amazon, and Google's parent company Alphabet all benefited from the growth of data center business driven by AI demand in 2023.
Mapping by journalist Cai Ding (data source: Bank of America)
As for why the "seven giants" in the US stock market can continue to rise, Daniel Ives, the managing director of Wedbush and a senior stock analyst, pointed out in an email to the reporter of the Daily Economic News that "since 2024, the market's enthusiasm for AI has soared, and we believe that this is the largest technological change since the birth of the Internet. For Wall Street and AI skeptics, all this will ultimately fall to the AI profitability of major enterprises. We expect technology companies' spending on AI to increase by $1 trillion in the next decade
Ives stated that although bears are still concerned about the valuation of such AI technology companies, they believe that with the continued surge in AI spending, Wall Street's financial report data (and valuation) for the fiscal years 2024-2025 will rise. He believes that all of this is due to the explosive growth in the practical application of AI, which will drive technology transformation led by software and chips and continue until 2024 and beyond, as we predict that 2024-2025 will still be a bull market for technology stocks.
"Based on our recent work in this field, we believe that over 60% of Microsoft's installation infrastructure will ultimately be used for AI functionality in the enterprise/business sector over the next three years, which will change Microsoft and its future prospects. Although the actual application of AI will significantly increase in fiscal year 2024, for Microsoft, fiscal year 2025 will be the real turning point for AI growth." Ives added in an email to reporters.
Meanwhile, Ives predicts that "Google (GCP) and Amazon (AWS) cloud platforms are also expected to have huge development opportunities from this unprecedented wave of AI in the next year to a year and a half. From the perspective of AI chips, the beginning is led by Huang Renxun and Nvidia, and the next is the competition for second, third, and fourth in this transformation."
The Daily Economic News reporter also noticed that while funds are crazily bullish on the "Big Seven" US stocks, some analysts have pointed out that some of these companies have controversies.
For example, while other giants have been rising recently, Tesla has been falling, and the company has recently warned that the situation may not improve in the near future. After doubling its stock price last year, Tesla has fallen by 22% since 2024, which is particularly eye-catching compared to Nvidia's 46% increase and Meta's 32% increase in the same period. In fact, Tesla has become the worst performing stock among the "Big Seven" since the beginning of middle age.
According to data compiled by Bloomberg, despite Tesla's stock price decline, the weight of the entire "Big Seven" in the S&P 500 index still reaches a record high of 29.5%. Although Musk has been trying to position Tesla as an AI company, the reality is that Tesla faces a series of unique challenges.
"Although Musk may disagree, investors do not view Tesla as an artificial intelligence concept stock like they do with the other six giants. The demand for Tesla products is fading, while demand for companies more closely connected to artificial intelligence is exploding," said Matthew Maley, Chief Market Strategist at Miller Tabak+Co
Among Wall Street analysts covering Tesla, only about 33% suggest investors buy Tesla stocks, while the average proportion among the other six giants is 85%. In addition, over the past 12 months, analysts have lowered Tesla's average net profit forecast for 2024 by nearly half, while the profit forecasts of the other six giants have either been raised or remain unchanged.
In addition, the continued rise of the "Big Seven" in the US stock market has also triggered concerns about "Internet 2.0" and excessive concentration. Bernstein analysts warned in a report that the valuations of the "Big Seven" in the US stock market were too extreme: "If these seven giants are truly unique, then their significant performance may be reasonable. Unfortunately, this is not the case. Instead, there are increasing signs that investors' enthusiasm for these seven stocks reflects today's speculative, momentum driven market."
Goldman Sachs: The "11 giants" of European stocks are more attractive than the "7 giants" of American stocks
Looking at the world, the stock market supported by several giants is not just limited to the United States.
Goldman Sachs recently released a research report stating that the top 11 performance stocks in the European stock market in 2020 have performed very well in recent years. These "11 giants" (GRANOLAS) account for 60% of the total increase in European stocks over the past year, and their level of risk is much lower than the "7 giants" in the US stock market.
Goldman Sachs pointed out that considering the unique characteristics of these stocks such as strong profit growth, low volatility, high and stable profit margins, and robust balance sheets, it is expected that the "11 giants" of European stocks will dominate this stock market cycle.
Specifically, the "11 giants" mentioned by Goldman Sachs in European stocks are GlaxoSmithKline, Roche, Asma, Nestle, Novartis, Novo Nordisk, L'Oreal, LVMH, AstraZeneca, SAP, and Sanofi. According to Goldman Sachs calculations, the total market value of the "11 giants" in European stocks exceeds 2.6 trillion euros, accounting for 1/4 of the total market value of the European Stoxx 600 index, equivalent to the total market value of heavyweight industries such as energy, basic resources, finance, and automobiles in the index.
When summarizing the changing trends in the European market, Goldman Sachs pointed out that 20 years ago, traditional industries such as telecommunications and oil led the market, while today it is industries such as consumer goods and pharmaceuticals.
Mapping by journalist Cai Ding (data source: Goldman Sachs)
Goldman Sachs analyst Peter Oppenheimer wrote in a report to clients on February 12th, "20 years ago, in early 2000, the top 10 European companies by market value were telecommunications and oil companies, with HSBC being the only exception. Today, there are no banks, oil or telecommunications companies among the top 10 European companies by market value."
In terms of performance, in the past 12 months, the total revenue of the "11 giants" mentioned by Goldman Sachs in European stocks has exceeded 500 billion US dollars, with an annual growth rate of 8%. In the past year, the average stock price increase of the "11 giants" in European stocks was 15%, far exceeding the 5% increase of the Stoxx 600 index during the same period, and their contribution to the growth of the Stoxx 600 index was about 60%.
What makes many investors even more envious is that the P/E ratio of the "11 giants" in European stocks is only 20 times. Although there is already a premium compared to the overall European market, this is the standard for growth companies, and compared to the "Big Seven" in the United States with a price to earnings ratio of 30 times, it is equivalent to a 70% discount.
In addition, the average dividend yield of the European giants on the "GRANOLAS" list is 2.5%, which is much higher than the average dividend yield of 1.5% of the S&P 500 index constituent stocks, and also dwarfs the average dividend yield of 0.3% of the "Big Seven" in the US stock market.
However, the European giants in GRANOLAS are not without risks. Goldman Sachs pointed out that overall, the "11 giants" in European stocks have less than 20% of their revenue from Europe, so their performance is closely linked to global market dynamics. Exchange rate fluctuations, especially the strengthening of the euro, may have a greater impact on these giants than other European companies. In addition, the "11 giants" with an average exposure of 37% to the United States also pose a tariff risk, especially if Trump wins the election again.
Disclaimer: The content and data in this article are for reference only and do not constitute investment advice. Please verify before use. Based on this operation, the risk is borne by oneself.
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