Averages can hide a multitude of sins, and this is particularly the case with the Mega 7 in financial markets.
So far this year, investors in the US S&P 500 Index have been very happy with themselves, wondering what all the recession talk is about while they have enjoyed 15% returns so far. This is a very attractive return, after all, if you can average 15% per year consistently, you will double your money every 5 years.
The following chart pulls apart that return and highlights how 7 mega stocks have dominated the market and produced the bulk of the returns.
If you haven’t owned the mega 7, your portfolio return has been a subdued 4%, a far cry from the headline 15%.
The reason for the disparity is the artificial intelligence (AI) craze gripping the market. There is little doubt in my mind that AI will be one of the most important game changers in how we work and interact with each other in the future, but like all new paradigms, there can be a bit of froth and bubble along the journey.
A large portion of the Mega 7 growth outperformance can be attributed solely to Nvidia (NVDA) whose groundbreaking microchips are powering the rapid growth in AI utilisation. While you may not have heard much about this company, its stellar rise has catapulted it to be one of the largest companies in the world, with its market cap topping $1 trillion recently. Nvidia has risen US$349.49 year to date or 244% and there appears to be no ceiling for Nvidia’s share price as fund managers and investors alike clamour to own the shares.
A word of caution on the share is that it is currently trading on a Price to Earnings ratio (P/E) of 119 times, or in other words, the share price is currently reflecting the company’s earnings for the next 119 years – assuming that earnings stay the same. It is that last little nuance that has everyone guessing, how much money will the company make in the future if AI becomes as pervasive as we suspect?
Andrew Aylward is Chief Investment Officer at Keep Wealth Partners.
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Keep Wealth Partners Pty Ltd (AFSL 494858)
This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from a financial planner who can consider if the strategies and products are right for you.
