The ascent of Big Tech has been nothing short of remarkable. Giants like Apple, Microsoft, Nvidia, Amazon.com, Alphabet, Meta Platforms, and Tesla have propelled the tech industry to unprecedented heights. However, concerns loom that this remarkable run may be a sign of a massive bubble waiting to burst.
The collective power of these tech behemoths has reached such staggering proportions that even Nasdaq, the benchmark index for tech stocks, felt compelled to take action. According to an obscure rule, if the combined weight of stocks constituting 4.5% or more of the portfolio exceeds 48%, a rebalancing is in order. Thus, Nasdaq made the decision to rebalance its Nasdaq 100 index.
This announcement had a minor dampening effect on Big Tech’s sails earlier this week. On Monday, the Nasdaq 100 saw a meager rise of less than 0.11%, underperforming both the Dow Jones Industrial Average and the S&P 500. Six out of the seven major players experienced a dip in their stock prices. However, this proved to be only a temporary blip on the radar. By Thursday, the Nasdaq 100 had rebounded with a gain of 3.6%, outperforming both the S&P and the Dow.
While size has its advantages, it can also be an obstacle to sustained performance. Rebalancing is an inevitability for indexes, leading to forced selling by investors who are benchmarked against them. Additionally, active fund managers face similar constraints due to position limits. The Big Seven’s size works against them as well. It is far more challenging for a stock to double in value when it must climb from $3 trillion to $6 trillion, as is Apple’s current situation, compared to going from $1.5 trillion to $3 trillion.
However, labeling this situation as a bubble would be an overstatement. Comparing the present state of affairs to the dot-com bubble of 1999 reveals stark differences. While the Nasdaq has surged by 42% this year, surpassing the 29% increase seen at the beginning of the notorious dot-com bubble, the preceding trends paint a contrasting picture. Over the past two years, the Nasdaq has only risen by 4.2%, whereas it experienced a staggering 134% surge during the two years leading up to July 13, 1999.
In conclusion, the trajectory of Big Tech remains noteworthy and deserving of scrutiny. While concerns about bubbles may persist, a more measured analysis reveals key distinctions between the current landscape and past episodes of market exuberance.
Mega Cap/Growth Cluster Positions: A Buying Opportunity
Seaport Global strategist Victor Cossel challenges the notion of solely focusing on the 1999 analog when evaluating the current state of the market. He argues that downplaying the significant drawdowns experienced in both stocks and bonds during 2022 is dismissing a crucial factor in assessing the market’s condition. Despite the pain endured by assets throughout the year, Cossel believes that these events should not be written off.
Looking beyond sheer valuation, Cossel highlights that the Nasdaq 100’s cyclically adjusted price/earnings ratio stands at 46 times, significantly lower than the peaks observed in 2000 (113 times) and 1990 in Japan (83 times). While acknowledging that valuations remain high, a cautious approach would often suggest reducing exposure.
However, Citigroup strategist Scott Chronert points out that fund managers have been struggling to keep up with the index, which may lead to performance chasing. Additionally, recent decreases in futures positioning indicate greater potential for buying opportunities.
In light of this, Cossel recommends holding existing mega cap/growth cluster positions and viewing any weakness within this group as an opportunity for acquiring further assets.
The Case for Alibaba Group Holding (BABA)
While mega cap/growth cluster positions remain attractive, other opportunities should also be considered. An instance of this can be seen with Alibaba Group Holding (BABA), which currently boasts a market cap of $243 billion – significantly lower than Apple’s market cap. Despite this, Alibaba projects faster growth, making it an appealing option.
The Bear Traps Report’s Larry McDonald draws attention to the vast discrepancy between Alibaba and Apple, stating that nearly 13 Ali Babas equal the market cap of one Apple. McDonald believes that, in the months to come, Alibaba will outperform Apple as it becomes less crowded.
Wolfe Research strategist Chris Senyek values Alibaba based on the sum of its parts. He predicts that the Taobao Tmall business alone will be worth 12 times its 2024 earnings, amounting to $85. The remaining businesses are estimated to be valued at around $60. This would place Alibaba’s stock at $145, marking a 50% increase from Thursday’s closing price of $96.61.
While not quite a doubling in value, this forecast presents an encouraging start.
