Nvidia and the tech-dominated US market aren’t a bubble but things appear frothy, cautions billionaire investor Howard Marks.
The good news: Marks, who famously released a note titled Bubble.com just months before the dotcom bubble burst in 2000, says the magnificent seven are “incredible” companies whose high valuations “could be warranted”.
The S&P 500′s valuation is “high but not insane”.
Marks doesn’t hear people saying there’s “no price too high” and says markets “don’t seem nutty”. Less positive is the skyrocketing price of bitcoin, with a two-year return of 465 per cent not suggesting an “overabundance of caution”.
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Similarly, stocks are expensive. Marks says in the past, when the S&P 500 traded at valuations similar to today’s, it always earned 10-year returns between plus 2 per cent and minus 2 per cent.
Higher valuations “consistently lead to lower returns”. As for today’s “sexiest” stock – Nvidia – Marks says it’s cheap compared to the Nifty Fifty, the infamous growth stocks like Polaroid and Xerox that excited investors in the early 1970s.
Still, a price-earnings ratio in the 30s implies investors think Nvidia will “demonstrate persistence” – that is, it will continue growing for decades and won’t be supplanted by competitors.
However, persistence “isn’t easily achieved”. The 20 most valuable US companies in 2000 included firms like General Electric, Cisco, Intel, AIG, and AT&T. Of today’s magnificent seven, only Microsoft was in the top 20 in 2000. History shows even the magnificent can falter – persistence is the true test, and markets rarely make it easy.
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