As the demand for AI exploded, humans entered the era of artificial intelligence. Historically, every time a new technology appeared, the economy was structurally changed. Some developed rapidly and steadily, while others led to a boom and bust cycle of investment. Is this AI explosion actually bringing about a bubble or a boom?

Deutsche Bank analyst Jim Reid released a research report last week saying that, driven by AI technology and macro-interest rate cut expectations, the total return rate of the Seven Sisters exceeds that of other major stock indices such as the S&P 500, and the total market capitalization can reach the second-largest stock market in the world, leading to a record high concentration of US stocks. This concentration can be comparable to the Great Depression and the outbreak of the Great Depression, and has also raised market concerns about the vulnerability of high concentration of US stocks.

At the same time, the price-earnings ratio of the Seven Sisters exceeds the global average. The current high valuation includes the market's optimistic expectation that the Seven Sisters will always win. Moreover, most of the Seven Sisters are growth stocks, and their profitability performance is not as impressive as market capitalization. This raises questions about whether the Seven Sisters can achieve their growth goals and prove the rationality of their high valuations?

Looking ahead, the current trend of de-globalization has potential risks for the Seven Sisters, but Reid suggests that the Internet has localized the world, and nearly 40% of the global population is unable to connect to the Internet, providing potential growth space for the Seven Sisters. Moreover, the popularity of mobile communications will also drive the growth of the Seven Sisters.

1) The total return of the Seven Sisters surpasses other major stock indices

Reid pointed out that the total return of the Seven Sisters of US stocks since March 2015 has far surpassed major broad-based indices such as the S&P 500 Index, the Nasdaq 100 Index, and the European Stock 600 Index.

Total return in dollars since March 2015

2) High concentration of US stocks raises concerns about market fragility

Reid stressed that due to the huge market capitalization of the Seven Sisters of US stocks, the current concentration of the US stock market has reached a record high. As the performance of the stock market depends more and more on the Seven Sisters, their performance is also becoming more and more important to overall market health and macroeconomic stability. Because a highly concentrated market structure may increase the fragility of the market.

The last time market concentration reached such a high level was before the Great Depression, one of the worst economic recessions of the 20th century. In the past, when the price of a market or asset deviated from its historical average, a return to the mean usually occurred. Judging from historical experience, highly concentrated market structures may face significant market adjustments.

At the same time, Reid raised a key question: in this context of unprecedented concentration, is the current situation similar to history?

3) The market capitalization of the Seven Sisters can reach the world's second-largest stock market

Reid said that the total market capitalization of the Seven Sisters is huge. If you think of them as a separate entity, their market capitalization will form the second-largest stock market in the world after the US. Moreover, the market value of the Seven Sisters is double the market value of the Japanese stock market, which ranked fourth. Furthermore, the respective market capitalization of Microsoft and Apple is comparable to that of all listed companies in France, Saudi Arabia, and the United Kingdom.

4) The Seven Sisters are more like a country than a company

Reid mentioned that this chart has the same order of groups and market capitalization as the previous chart, but adds profit data (LTM) for listed companies in G20 countries for the last 12 months.

For example, Apple's annual profit accounts for about 60% of the total profit of the French stock market's constituent stocks, or more than 50% of the total profit of the German stock market's constituent stocks. The sum of the seven sisters' profits is roughly equivalent to the total profit of the constituent stocks in the Japanese stock market. Judging from the market capitalization size and profitability, the Seven Sisters are more like a country than a company.

5) The profit ranking of the Seven Sisters is inferior to the market capitalization ranking

Reid said that although the Seven Sisters are in a leading position in terms of market capitalization, they are relatively lower in terms of profit rankings, especially Microsoft, Amazon, and Nvidia. Because these companies are still viewed as growth stocks, investors are betting on their future earnings growth rather than just based on current profit levels.

Although the profit ranking of the Seven Sisters is lower than their market capitalization ranking, their profit still exceeds that of the listed companies in many G20 countries combined.

Markets such as the UK, Germany, Australia, Turkey, South Africa, and Brazil rank far higher in terms of profitability than market capitalization. Companies in these stock markets are more profitable compared to the size of their market.

This chart shows a comparison between the market capitalization size and profit rankings of the Seven Sisters and other countries' stock markets. The focus is on observing their respective performance in market capitalization rankings (left) and profit rankings (right)

6) The price-earnings ratio of the Seven Sisters exceeds the global average

Seven Sisters are growth stocks, and their price-earnings ratio is generally higher than the country's average price-earnings ratio. The return on investment in growth stocks may take longer to appear, as these companies tend to re-invest large amounts of money into expanding and developing new products or services, which may depress profits in the short term.

Reid raised a key question: even if the growth prospects of the Seven Sisters are very optimistic, can the Seven Sisters achieve their growth goals, justifying their overvaluation?

7) Highly concentrated market risk alert: Beautiful 50 history repeats concerns

Reid warns that the current high concentration of the market is comparable to the “Nifty 50” period from the late 1960s to the early 70s.

During the “Nifty 50” period, the market was dominated by a small number of 50 stocks. Because of their stable growth prospects and excellent operating performance, these stocks became the darling of investors. Investors were willing to pay high prices for these stocks, leading to a continuous rise in the valuation level of these stocks.

In the 1970s, fiscal expansion and the oil crisis both catalyzed major US inflation, the Federal Reserve's crazy interest rate hikes, and bonds and other fixed-income investments provided higher yields, reducing the appeal of Pretty 50. An environment of high inflation and high interest rates led to the bursting of the “Nifty 50” bubble.

This level of concentration has led some analysts to express concern about the risks associated with US and global stock markets. Historical high valuations and high concentration are often accompanied by subsequent market adjustments. Some analysts believe that investors should be wary of the continued market boom.

8) Low yield increases market concentration

In times of low returns, investors tend to look for investment opportunities that provide relatively high returns. This often increases demand for large stocks with good growth prospects, thereby increasing market concentration.

Conversely, when yields rise, fixed-income investments (such as bonds) become more attractive, and investors may shift capital from the stock market to the bond market, thereby reducing dependence on a single stock and reducing market concentration.

Growth stocks are particularly popular in a low-yield environment. When the returns on other investment options are relatively low, investors prefer to invest in growth stocks that provide potentially high returns. This preference has increased the market's concentration on these stocks, which has further boosted their valuations.

In the discounted cash flow model, the discount rate for future earnings in a low yield environment is lower, which means that the present value of future earnings is higher, thereby enhancing the valuation of these companies' high future earnings expectations.

9) Technological progress drives high concentration of US stocks

Reid pointed out that theoretically speaking, the high concentration of US stocks is a direct result of structural changes brought about by global technological progress, especially the Internet, mobile technology, and artificial intelligence.

The development of the internet, mobile technology, and artificial intelligence has drastically changed the way the economy and society works. These technological advancements have not only fueled the rapid development of emerging industries, but also brought changes to traditional industries, creating new leaders and winners in the stock market.

Therefore, companies that can make effective use of these technologies and have innovative capabilities and market leadership positions can often obtain greater market share and higher profitability, leading to an increase in market concentration.

However, Reid also said that although technological advancements have provided huge growth opportunities for some companies, investment trends themselves are constantly changing. For example, one period may be particularly optimistic about technology stocks, while in another, investors may shift to industries that value more value or stable income.

10) Potential risks under the trend of de-globalization

Over the past few decades, as globalization deepened, the world economy became more connected. Seven Sisters took advantage of the opportunities of globalization to conduct marketing on a global scale, attracting the attention of global consumers, and thus seizing the growth opportunities of “global wallets.”

However, in recent years, the trend of de-globalization has also begun to emerge. This trend may lead to market segmentation, increase operating costs, and limit companies' market access, thus having a negative impact on large multinational companies that rely on the global market. For the Seven Sisters, the trend of de-globalization may affect their revenue and profit growth.

11) 40% of the unconnected population is the driving force for the growth of the Seven Sisters

Reid emphasized that currently, de-globalization is a secondary issue because the Internet has localized the world, providing enterprises with the ability to directly communicate and trade with global consumers across geographical and political barriers. While physical boundaries may become more closed, digital boundaries are more open.

The Seven Sisters have successfully taken advantage of the global opportunities brought by the Internet, enabling them to reach global consumers and transcend traditional market and geographical restrictions.

Although the Internet has greatly boosted the growth of the global economy and the flow of information, nearly 40% of the global population still does not have access to the Internet. Reid proposed that the global population without internet access is a huge potential for the Seven Sisters to grow in the future?

12) The popularity of mobile communications drives the growth of the Seven Sisters

Reid points to another important global trend, the spread of mobile communications. Utilizing the popularity of mobile communications and the development of related technologies is one of the key factors in the success of the Seven Sisters.

The data shows that in 1994, the number of mobile phone subscriptions per 100 people worldwide was less than 1. By 2007, that number had reached 50 subscriptions, and now it's over 100.

For the Seven Sisters, as the number of mobile device users has increased, so has the demand for apps, online services, and mobile advertising. Mobile phones have become the preferred way for many people to obtain information, communicate, conduct e-commerce, and use digital services, bringing significant revenue and profit growth to the Seven Sisters.

13) Potential bubble risk

Reid believes that historically, every time a new infrastructure or communication technology (such as railways, electricity, telephones, internet, mobile communications, etc.) appears, it will cause huge structural changes in the economy. For example, the spread of the Internet has not only spawned the digital economy, but also changed the competitive landscape of traditional retail, media, and financial services industries.

Different technology and infrastructure projects spread at different rates and levels of impact in the economy. Some technologies are rapidly maturing and becoming saturated, such as railways and telegraphy, while the impact of others, such as the Internet and mobile communications, continues to expand.

The speed at which technology matures and saturates has an important impact on economic cycles and investment strategies. Some of these structural changes developed rapidly and smoothly, while others led to boom-and-bust cycles of investment.

The adoption of new technology is often accompanied by a surge in investment, as companies and investors seek to seize the opportunities presented by the new technology. This boom can promote rapid economic growth, but it can also lead to overinvestment, asset bubbles, and ultimately investment depression. Historical examples include the railroad bubble in the 19th century and the internet bubble in the late 20th century.

Finally, with regard to “Can the Seven Sisters continue to dominate?” Jim Reid gave his explanation for this question.

Factors supporting the continued growth of the Seven Sisters:

1. Network effect: Since the Seven Sisters already have global influence and high innovation capabilities, they still have a lot of room for growth in expanding their user base and increasing service value.

2. Although AI technology has made significant progress, it is still in its early stages. AI can provide the Seven Sisters with huge potential for growth and innovation.

The profitability of the 3.7 sisters has surpassed that of many large countries. They have crossed borders in an unprecedented way, showing a completely different level of stability and maturity than during the Internet bubble in 2000.

Factors preventing Seven Sisters from continuing to maintain their dominant position in the market:

1. In recent years, there has been an increase in anti-monopoly actions against large technology companies. Antitrust lawsuits and investigations may force these companies to adjust their business strategies, sell parts of their business, or face huge fines, affecting their growth and profitability.

2. Public scrutiny of artificial intelligence is likely to increase, which may limit the development and commercial application of AI technology.

3. Geopolitical tensions and the complexity of globalization have increased the risk of accidental or deliberate damage to infrastructure. This disruption could impact a company's data center, communications network, and supply chain, thereby affecting its business continuity and customer trust.

4. Investors' preferences and market trends will change over time, and new competitors may emerge to challenge existing companies' market positions. Furthermore, the future direction of artificial intelligence is uncertain, and it is currently unclear who the final winner will be. Rapid changes in technology mean that even current market leaders can't guarantee staying ahead forever.

5. The current high valuation includes optimistic expectations that the Seven Sisters will always win.

Editor/Jeffrey