February proved to be another good month for the stock market as the S&P 500 stock index rallied 4% driven by investor excitement on Generative Artificial Intelligence and optimism on the overall economy. The strong market rally was across all sectors from Consumer Discretionary and Energy to Industrials and Technology. This market rally was in spite of interest rates rising during the month with the 2-year Treasury yield increasing from 4.20% to 4.56%.
Two Year Treasury Yields
Source: Bloomberg
Investors have shifted towards a risk-on sentiment. The price of bitcoin, which can gauge the amount of speculation in the market, has reached new all-time highs after crashing in 2022. Technology stocks that have exposure to the Artificial Intelligence sector have far outperformed. For example, micro chip designers Nvidia and Advanced Micro are now trading at sky-high valuation multiples of 70x and 322x Price to Earnings ratios respectively due to the stock price appreciation.
Market bubbles are always easier to see in the rear-view mirror than ahead. Still given the frenzy around the adoption of Generative Artificial Intelligence and high expectations of revenue growth associated with the technology, investors are wise to wonder if they are now in bubble territory. This bar is especially high for the “Magnificent Seven” stocks defined by Apple, Microsoft, Nvidia, Amazon, Meta Platforms, Alphabet and Tesla that have not only performed amazingly well but in fact carried the overall stock market over the past year. As time passes, these seven stocks will be under increased pressure from investors to deliver on their higher growth expectations with valuation multiples that can always contract.
