One day surging $100 billion, is Nvidia (NVDA.US) leading US stocks into another bubble era?

From the late 1990s boom cycle that ended with the bursting of the internet bubble at the beginning of this century, to the current stock price rebound sparked by artificial intelligence at NVIDIA (NVDA.US), investors have always had a strong interest in American technology stocks. However, prosperity often ends in tragedy, and this time may make investors feel both wallet-pain and heartbreak. Dhaval Joshi, Chief Strategist at BCA Research, stated in an analysis report that artificial intelligence has officially pushed the American technology industry into a bubble, and Silicon Valley may be on the edge of another collapse. Joshi said, "We are in the midst of an artificial intelligence bubble. We are surprised by some of the outcomes." Few stocks can embody this astonishing factor like NVIDIA, with a market capitalization of $1.7 trillion. NVIDIA reported earnings on Wednesday that exceeded analyst expectations. The chip maker was called "the most important stock on earth" by Goldman Sachs analysts. The company reported revenue of $22.1 billion in the last quarter, surpassing expectations of $20.6 billion. Revenue from data center chips used for artificial intelligence models and generative AI applications reflected demand growth, reaching $18.4 billion, an increase of 27% from the third quarter and 409% from the same period last year. The stock price rose 7% in after-hours trading, adding over $100 billion to its market capitalization. NVIDIA co-founder and CEO Jensen Huang said in a press release, "Accelerated computing and generative AI have reached a tipping point." He added, "The demand of companies, industries, and nations worldwide is skyrocketing." Although Joshi did not specifically comment on NVIDIA, its outstanding performance can be seen as evidence of his viewpoint. According to an analyst report released by Joshi last week, tech stocks are currently priced at a 75% premium over global stocks. Their hot growth has become the backbone of most of the growth in the US stock market and has propelled the Nasdaq index close to historical highs last year, only 6.5% below its November 2021 peak. In 2023, the so-called "Mega 7" consisting of NVIDIA, Apple, Microsoft, Alphabet, Meta, Amazon, and Tesla contributed two-thirds of the total market gains in the S&P 500 index. While these returns are impressive and rewarding for savvy investors, Joshi believes they are unsustainable. Unlike NVIDIA, some companies may not meet the lofty expectations set by the market. This could spell trouble, as valuations and stock prices often contradict expectations, just like they are the actual results. If large tech companies that make up a significant portion of industry (and economic) growth fail to meet analyst expectations, they could drag down other companies. While Joshi warns not to underestimate artificial intelligence as a whole, he believes the market is overpricing the productivity growth brought by this new technology. When new innovations fail to meet these expectations, the market will punish the companies producing them. Joshi said, "Given the size of these stocks in market capitalization, mathematically, any disappointment will impact the overall index." For US tech stocks to avoid a bubble, they must maintain a 10% premium relative to the market, which Joshi believes is unlikely to happen. Joshi does not blame the market for valuing tech companies so highly. In fact, they have delivered outstanding performance time and time again over the past decade, proving their worth. Top tech companies' stocks have been soaring over the past decade. For example, since February 2014, NVIDIA's stock price has risen by 14,927%, Microsoft by 964%, and Apple by 875%. Compared to the robust 163% return of the S&P 500 index over the past decade, these numbers seem insignificant. While he does not believe this situation will continue, he states that the market's continued digestion of the explosive growth in the tech industry is rational. "If you have very strong profit growth over a year or two, the market has a different thought: 'This growth cannot continue.' If anything different happens, it's that you gave it a very low valuation because you said the earnings of these companies are abnormally high. But if the market sees 10 years of excellent performance, it no longer considers these results abnormal, and believes this situation will continue," Joshi said. However, for Joshi, the huge profit growth over the past decade is actually abnormal. In large part, this is due to the result of network effects, which inflate the size of a few companies and effectively control the market. Joshi wrote in the report that Amazon has dominated the online shopping market, Google the search market, and Meta the online communication market. He said, "Once you have a network, there are winners and losers. These winners become natural monopolies, and if you are a natural monopoly, you are in a very advantageous position to increase your profits." Joshi believes that without clear signs that network effects will the world of artificial intelligence, these companies will not have the same dominant position. "The market is saying, 'Hey, the baton will now be passed to generative artificial intelligence, which will continue this trend in the next 5 to 10 years.' I am very skeptical of this because generative artificial intelligence does not have network effects. If some particularly popular AI tools attract more users, they may see network effects as they will be able to self-train on all tasks they are asked to perform. Even without artificial intelligence, the benefits of network effects seem to be diminishing in the near future as elected officials push for regulation on large tech companies. "The Web 2.0 revolution has reached its limit due to consumer backlash, and much stricter regulation on what data you can collect and how you can use that data, he said. In Europe, the EU has already passed laws that restrict the unrestricted growth of these tech giants. Overall, the tech stock market, while currently booming, may be at risk of a bubble if it is not sustainably supported by market conditions and solid performance.Several landmark legislations have been passed aimed at breaking up tech giants like Apple and Alphabet that dominate the market. In the United States, although there is no national privacy law, both parties and the public are showing unprecedented support for a series of new laws that will limit the amount and type of user data that tech companies can collect.However, although Joshi sees the obstacles that the technology industry is about to face, he does not believe that the industry as a whole will collapse like during the bursting of the Internet bubble. In fact, it will continue to outperform the overall market at a slower pace. This may still mean huge losses for investors, especially when the market eventually adjusts due to the tech industry no longer providing hundredfold returns. It is certain that there is still fierce debate about whether the market is in an artificial intelligence bubble. It is not only Joshi who believes there is such a problem. Morgan Stanley has warned against rushing into the AI field, so investors do not miss out on enough investment opportunities before the bubble bursts. At the same time, Goldman Sachs and other companies believe that the soaring returns are not a bubble, but rather the market's expectation of future returns from technology. As for what investors should do to reduce the risk of a potential AI bubble, Joshi has some simple advice: invest in other sectors such as healthcare and luxury goods.