“For me, a bubble or a collapse is more a state of mind than a quantitative calculation.” It is from this prognosis that Howard Marksthe founder of Oaktree Capitalprepared a letter to clients to decipher whether the market could be facing a bubble involving the main American technology companies.
His credentials give weight to the memo. Marks was one of those responsible for anticipating, in the early 2000s, that he would take a series of companies from the telecommunications and e-commerce sector with him.
In ten pages, Marks is less definitive this time and avoids creating a bubble, although he shows concern about the investors’ stance towards the group called “Magnificent Seven”, formed by Alphabet (Google’s parent company), Apple, Microsoft, Amazon, Nvidia, Meta (owner of Facebook, Instagram and WhatsApp) and Tesla.
For him, a bubble does not just reflect soaring stock prices, “but a state of mania characterized by — or, rather, the result of — the following”:
- Highly irrational exuberance
- Absolute adoration of the companies or assets in question and the belief that they can do no wrong
- Excessive fear of being left behind if you stop participating in the moment (a feeling called FOMO, or fear of missing out, for its acronym in English)
- Conviction that, for these actions, “there is no price too high”
Howard Marks does not create a new bubble, but makes signals
Investor behavior today is similar to some of the last major bubbles in the United States, such as the internet bubble, which he himself predicted, and the Nifty Fifty in the 1970s, says Marks.
He cites the example of Nvidia (), the chip developer that has become the darling of technology investors. Based on the current multiples based on future profits at which the company’s shares are traded today, investors’ projections are that the company will continue to grow until 2030, without being supplanted by competitors.
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It’s a rare level of “persistence.” Marks demonstrates that, among the 20 most represented companies in the S&P 500 24 years ago, Microsoft () is the only one among the “Magnificent Seven” that was already there.
This type of behavior, he assesses, is often better explained by psychology than by numbers. “When everyone believes things can only get better forever, it can be difficult to find anything reasonably priced,” he wrote in the document.
“Bubbles are marked by bubble thinking. Perhaps by working on proposals we should say that bubbles and collapses are moments in which extreme events lead people to lose their objectivity and see the world through a distorted psychology — whether positively or negatively”, he says.
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Your reading is that there are three stages to identify one (price rise cycle).
The first of these occurs right after a market crash that leaves investors discouraged, where only a few more discerning people are able to imagine an improvement scenario. Then there is an improvement that leads everyone to believe in an improvement, and then, at the last moment, when profits are rising and everything looks good, the assessment is that nothing can get worse.
In October, the “Magnificent Seven” represented between 32% and 33% of the capitalization of the S&P 500. In the last 28 years, the largest share that the seven companies at the top of the index had was 22% in 2000, at the peak of the bubble. Internet.
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Marks weighs some counterarguments: S&P 500 multiples are high, “but not insane”; the “Magnificent Seven” are “incredible” companies, so the price-to-earnings multiple could be guaranteed; he also doesn’t hear people saying that “the price is not that high”; and the market, although overvalued and superficial, does not seem “crazy”.
Concern on Wall Street
The founder of Oaktree is not the only voice to argue that there is a risk of a bubble bursting. Late last year, Nvidia said in a letter to its investors that it is in a “bubble” and that the artificial intelligence (AI) technology driving the company’s share price is “overrated.”
Many of the supposed uses of AI “will never be economically viable, will never work correctly, will consume too much energy, or will prove suspicious,” said a letter released internally, according to the Financial Times.
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Roger McNamee, CEO of venture capital firm Elevation Partners, said in an interview with CNBC in July that the United States “loves a financial mania” and said that projections made by investors to fund it are difficult to evaluate. The expert believes that a bubble may be forming.
