Forgot dot-com comparisons: The Magnificent 7 look like the Nifty 50 bubble that burst in the 1970s and sent the group tumbling 60%, famed economist says
- The Magnificent Seven tech stocks are looking a lot like the Nifty Fifty bubble in the 1970s, David Rosenberg said.
- Tech firms today make money unlike those in the dot-com bubble — but so did the companies in the Nifty Fifty, and that group ended up crashing, he argues.
As AI hype seeps through the market and the Magnificent Seven stocks soar, investors are biting their nails about what happens next.
Many have sounded the alarm of a 1999 redux. They say AI hype is like the internet, and companies are too overvalued. But for everyone sounding the alarm about a dotcom 2.0, there's an easy comeback: tech stocks don't look like they did in 1999. This time around, they actually make money.
But there has been a bubble of profitable companies that has burst before: the Nifty Fifty stocks in the 1960s and 1970s. After a period of outperformance during which they were seen as unassailable, those stocks eventually tumbled 60% between 1973 and 1975, Rosenberg notes.
"This infamous group of 50 companies were considered strategic 'buy and hold forever' picks before their crash in 1973 and ensuing abysmal performance," he wrote in a note on Wednesday. "These were real companies with real investment themes behind them, but investor sentiment turned to euphoria and fueled prices and valuations into bubble territory beyond what the fundamentals justified."
To be sure, not all Nifty Fifty companies ended up failing. The group included such firms as Coca-Cola, Proctor and Gamble, and McDonald's.
But it's not great that markets are so concentrated right now, Rosenberg said. Even though the fact that the pantheon of seven tech stocks contribute to a big chunk of S&P 500's gains — 45% in January alone — people are pouring money into them anyway.
And the euphoria is giving him major flashbacks.
"What is happening with the Magnificent 7 is the same as what happened with the Nifty Fifty — investors prone to hype will over-extrapolate, lose their discipline and resolve, and give in to the temptation to join the herd," Rosenberg wrote.