The surge in tech stocks appears unstoppable on Wall Street. One standout example is the American chipmaker Nvidia, which has crossed the $3 trillion market capitalization threshold, joining the ranks of Apple and Microsoft—both tech giants themselves.
This market trend has sparked a debate among investors and analysts: are we witnessing a new tech bubble?
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Key factors to monitor
At present, there are no clear signs of a bubble. Despite high stock valuations, these have previously reached even higher levels. Moreover, today’s rise in tech stock prices is generally accompanied by a corresponding, if not greater, increase in profits.
The first indicator to watch for potential bubbles is whether there is an overvaluation, which is necessary but not sufficient on its own. It’s also crucial to assess if future profit projections are realistic and if investors are behaving irrationally, using excessive leverage and tolerating high levels of risk.
Applying these assumptions to the current market context, we see that in the United States, the price-to-earnings ratio is around 21 times, significantly above the ten-year average.
The Nvidia case
Nvidia’s case further illustrates this point. Over the past year, its stock price has tripled, but its profits have quintupled. This has led to a decrease in its price-to-earnings ratio by 15%. Thus, investors are now buying Nvidia shares at a more favorable valuation than a year ago.
Looking at Oracle, a company that weathered the dot-com bubble around 1999-2000, its stock price increased fivefold, while profits grew by 60%, resulting in the price-to-earnings ratio tripling.
This shows that in 2000, the market bet on profit growth that didn’t materialize. Today, tech stocks grow at a slower pace than profits, making them paradoxically cheaper.
No sign of speculative bubble
As a practical recommendation, a comprehensive market examination does not reveal clear signs of a speculative bubble as seen in 2000, 2007, or even 2021.
Thus, investing in the stock market is sensible, provided there is a suitable investment horizon to navigate inevitable market volatility.
Alternatively, flexible investment strategies that manage exposure to various markets and smooth out volatility are a viable option.
Read also: The stocks to avoid in 2024 for risk-free investments
