The Magnificent 7. From hero to mere mortals...

What happens if you put all your eggs in one basket?

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The seven largest stocks in the US are currently collectively down on the year, and if it weren’t for Meta providing a stellar performance (for slightly unknown reasons), they would be down a lot more.

Big tech's dominance in the market is starting to show signs of weakness as earnings reports from the Magnificent 7 companies in recent weeks fail to impress investors, resulting in muted stock reactions. Nvidia reports this week, and arguably that's ‘the big one’ but expectations are so high, it’s hard to imagine they can overshoot again.

There is a growing fear of overvaluation in the market, with concerns about late-stage bull market dynamics. The incremental record highs and rotation out of some tech stocks are clear indicators of this trend. Investors are now trimming their exposure to these high-flying tech names due to their lofty valuations and increased capital spending on AI.

Here is how they are faring so far in 2025:

US stocks are expensive. Presently US large caps trade at 26.6x their trailing earnings, a top 10 per cent valuation. Ignoring for a moment that valuations in European and UK stocks are well below their long-term averages it begs the question: Are we in a bubble? Or are US stocks just expensive?  

We must first define the difference between “expensive” and a “bubble”.

A bubble is a deeply unsustainable condition, defined by both very high valuations and irrational market psychology, assigning unreasonable outcomes to a wide part of the equity market. Its bursting has significant implications for economic growth. Bubbles pop unexpectedly, causing recessions and forcing deep interventions from central banks and governments.

“Expensive” however, is different. Whereas it definitely merits a correction, its consequences are not nearly as profound. A correction may not cause a recession or even necessarily merit central bank action.

It may last longer than a bubble, punishing investors who reduced risk too early. We have seen this over the last few years from the bearing calls of Morgan Stanley and Warren Buffett. Caution is often rewarded, but for the last 2 years it has been punished.

Equity markets have been optimistic first on the hopes of AI, then on the expectations of lower interest rates and finally on the business-friendly prospects of the incoming Republican administration.

From a numbers-only perspective, it would certainly seem like a bubble. Equities rarely produce above-average returns from such high valuations. They did so in the early 1990s, in the late 1990s and the early 2020s. However, in the 1990s and 2020s the market was recovering from recession. Central bank interventions allowed stocks to rally well ahead of an earnings rebound, causing valuations to swell.

As we are not coming from a recession, this does not seem to apply. So the only comparable period is the late 1990s, the “dot-com” bubble.

In fact, this was the only time we have seen a 60 per cent rally on a two-year basis since 1980. Until now. Metrics such as market-capitalisation-to-GDP and percentage of assets in equities for US households are near or at 40-year highs.

Looking at two key surveys, the American Association of Individual Investors and the Conference Board, one would also find evidence of a bubble: the bullish sentiment in the AAII survey is at the top 10 per cent and the Conference Board survey at the top 0.3 per cent. Some corporate insiders (CEOs, CFOs etc) are already cashing out as is Warren Buffett has sidelined more cash than in the history of Berkshire Hathaway.

However, a bubble is more than just a valuation blowup. Those who have lived and invested through one remember a bubble as something more than just a numbers game. It is the widespread notion that stocks can only go up, that somehow “this time is different”.

With the caveat that very few can recognise a bubble in advance, we believe that the US equity market is very expensive (perhaps too expensive), and merits a correction, but we don’t have evidence to cry “bubble” just yet.

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The key to suspecting a bubble is the word “irrational”. Its hallmark is that everyone talks about it. Everyone invests, everyone has an opinion, and everyone is convinced buying is the only course of action.

This is not happening today, at least not across the board. The creation of meme stocks is something we will have to battle with for a while. Their very purpose seems to be to create a bubble, then burst it by selling out. More on this another day.

Brokerage earnings have increased, but are not exploding, which means that not everyone is investing. The words “stock market” do not appear excessively in the press. NY Fed surveys of lower education and income investors do not convey the same optimism as the Conference Board and the AAII surveys.

In fact, if anything, the market is too concentrated for a bubble, with the US tech sector accounting for nearly a third of market capitalisation. The whole point of a textbook bubble is precisely the opposite: wide dispersion of irrational outcomes.

Yet, outside the so-called magnificent seven, equities trade at a still expensive but more reasonable 22x earnings. We could argue that it’s a very localised bubble, but high valuations for these companies could also be justified.

In Europe and the UK equities trade at a 5-15 per cent discount vs long-term average. This would suggest that Europe would be a good place to be invested, but there is still a war in Ukraine, no convincing government in France and Germany’s GDP has stagnated for 2 years. The only really exciting companies are mega cap tech and that’s where the public wants to invest.

How do TPP get round this potential flatline of the global stock market?

Good question. The simple answer is that TPP is not simply a ‘buy and hold’ investment. We have active trading teams who work a little harder for your money.

Yes, we do have some more passive tracking style strategies, but even these are more than you’ll get elsewhere, using options to negate Black Swan Even risk. But it’s not these that make a TPP portfolio.

We would always suggest having some long-term investment tracking the markets, as the last few years has proven, sometimes markets (in this case US equities) just want to go up! However, imagine being able to liquidate a large portion of equity holdings in an instant. If an index rallies, it will often fall back down again the short term. Our ‘Long/Flat’ strategies are built just for this. They will look to call a high market and then move to cash.

Patience is a virtue when investing, and these trading strategies look to convert patience into yield. They do not just need the market to go up, they need it to go down as well. Miss a few of the market falls, buy back in and beat the benchmark is what we ask of these portfolios. We offer these in several markets including the FTSE, the CAC in France, DAX in Germany and all 3 major US indices.

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In a time when volatility is likely to be the only reliable result of the turmoil, a mix of trading ideas in your portfolio is key. Layer and diversify.

Include a tracker, include one or two long/flats that will buy and sell and buy and sell all year with only the one goal, to increase the value of your portfolio. Add to this an active strategy, and the diversification is complete. These are able to short sell the market. They will also buy when opportunity arises, but sell short if things look overvalued. These aren’t for everyone, as the only true long-term investment strategy that has been proven to work since the history of the stock market began, is based on the belief that over time stock markets increase in value. However, they don’t do this in a straight line and if you can catch a few sell-offs on the way up, then returns are compounded, and yields increased. Multi strategy, absolute portfolios are what we aim to achieve.

TPP has been designed to improve investor performance. Nothing is ever guaranteed, but surely putting the odds in your favour can’t be a bad idea.

Disclaimer: The views expressed in this article are the author’s own and should not be considered in rendering any legal, business or financial advice.

Past performance may not be indicative of future results. Therefore, you should not assume that the future performance of any specific investment or investment strategy will be profitable or equal to the corresponding past performance.

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