Are We in a Tech-Stock Bubble Like 1999?

The US equity markets started off 2024 on a surprisingly strong note. In particular, a few names related to artificial intelligence have seen their prices continue to hit new highs. Nvidia and AMD, for example, have been up +78% and +43% year-to-date (as of March 11, 2024). The drastic run-up in share prices has led many investors to ask – are we in a tech bubble like in 1999? 

The famous billionaire investor, Ray Dalio, says that we are not in a stock bubble, at least not yet. Here is a summary of his thoughts and analysis.

Who is Ray Dalio and what is his bubble indicator? 

Ray Dalio is the founder of the world’s largest hedge fund firm, Bridgewater Associates, which manages US$124 billion. He’s been a hedge fund manager for over 50 years and has witnessed a few bubbles in the capital markets firsthand. 

To make sense of the market, he developed a “bubble indicator” to help keep track of market conditions. Dalio’s bubble indicator has six big questions to figure out what’s going on in the market. According to Dalio, the bubble indicator is at the 52nd percentile, meaning that we’re not in a bubble right now. But let’s take a deep dive into some of these questions to see if we’re heading for a tech-stock bubble like it’s 1999.

Ray Dalio’s Bubble Indicator (1 March 2024):

ray dalio bubble indicator 1 Mar 2024
Source: 1 March 2024, “Are We in a Stock Market Bubble?” by Ray Dalio

How high are prices relative to traditional measures?

ray dalio bubble indicator 1 Mar 2024
Source: 1 March 2024, “Are We in a Stock Market Bubble?” by Ray Dalio

The first question is checking if the stock prices make sense compared to fundamental metrics such as earnings or book value per share. Currently, US stock prices are hovering around the 73th percentile, above historical trends, but have not reached an extreme.

Are prices discounting unsustainable conditions?

To spot a bubble, it’s important to check if stocks are reflecting some unrealistic future. Back in the dot bubble days, Cisco’s two-year forward P/E ratio was a whopping 100! In comparison, Nvidia’s two-year forward P/E ratio is around 27. While Nvidia’s share price has soared, so have its earnings. When you look at the broader picture with those Magnificent 7 companies, their market caps have grown in line with actual earnings. Overall, the Magnificent 7 appears expensive but not in a bubble territory.  

How broadly positive is investor sentiment? 

ray dalio bubble indicator 1 Mar 2024
Source: 1 March 2024, “Are We in a Stock Market Bubble?” by Ray Dalio

This question measures the market sentiment about the market, which is crucial in determining the future price movements. Right now, the investor sentiment is neutral to slightly positive but not excessively bullish.

Are Purchases Being Financed by High Leverage?

Leveraged purchases can be vulnerable to forced selling during a market downturn. During the tech bubble in 1999 and the post-pandemic euphoria period in 2021, the leverage gauge was at the 60th to 70th percentile. The current leverage gauge stands at the 23rd percentile, indicating a relatively healthy level.

ray dalio bubble indicator 1 Mar 2024
Source: 1 March 2024, “Are We in a Stock Market Bubble?” by Ray Dalio

Bottom Line

So, after looking at Dalio’s indicator and comparing notes with history, it seems like the overall market has not reached bubble territory. Based on these indicators, the Magnificent Seven stocks appear frothy, but their earnings have been growing strongly over the years to justify a large part of the price increase.

That said, this does not mean that the stock market will be one-way up. Historically, the S&P 500 has experienced an average drawdown of 14% each year.

The analysis that the current market is not in a bubble condition may provide investors with more reassurance to stay invested. Meanwhile, building a diversified portfolio is still important to ensure a smoother journey through periodic pullbacks in the market.

Overview of Magnificent 7 Performance Year to Date

magificent 7 performance
Source: Syfe Brokerage, 11th March 2024 

Introducing Brokerage Bundles: Simplifying Your Investment Journey

At Syfe, we’re constantly working to introduce innovative and accessible ways for you to grow wealth over the long run. With Syfe Brokerage Bundles, we’ve done just that. 

Now, you can instantly purchase shares in a group of companies or ETFs based on your preferences and convictions – at half the fees of buying each stock individually.

With Syfe’s Brokerage Bundles, you have a wide array of investment options tailored to your interests and goals. Whether you’re interested in tech giants, dividend stocks, or emerging sectors like AI and cryptocurrency, there’s a bundle for you:

  1. Magnificent 7 Bundle: Explore top US tech giants like Apple, Amazon, and Google.
  2. Warren Buffet Bundle: Emulate Warren Buffett’s strategy with Berkshire Hathaway’s top holdings.
  3. Dividend Stock (USD) Bundle: Generate passive income with carefully selected high-dividend-paying US stocks, preferred securities and real estate. 
  4. AI Revolution Bundle: Invest in industry leaders driving the AI revolution forward.
  5. Crypto Bundle: Gain exposure to blockchain and digital currencies.
  6. Bogle’s Three-Fund Bundle: Follow John Bogle’s index investing approach with a simple three-fund portfolio.
  7. Bill Ackman Bundle: Mirror the investment holdings of hedge fund manager Bill Ackman’s Pershing Square.
  8. India Bundle:  Tap into the structural growth story of India through investing in its fastest-growing sectors. 
  9. Japan Bundle:  Showcase Japan’s leading companies and sectors
  10. Ultra-Short Bond Bundle: Prioritise safety and stability with low-risk dividend-paying bonds. 

Investing in a brokerage bundle is simple and convenient. Here’s a quick guide:

  1. Explore available bundles in the brokerage discovery tab.
syfe brokerage
  1. Choose the bundle that suits your investment goals.
syfe brokerage
  1. Purchase the bundle directly from the platform.
syfe brokerage
  1. Add funds to your account using the provided QR code.
syfe brokerage
  1. Finalise the purchase and start tracking your investment.

Brokerage Bundles work best after you have set aside your emergency fund and build up your long-term investments through managed portfolios. Brokerage Bundles are useful to help you take advantage of market conditions and capture the upside. 

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