If you're worried big-cap tech stocks are in a bubble, don't be. That's the message from legendary hedge fund manager Ray Dalio.
Dalio, founder of Bridgewater Associates, says Alphabet and Meta Platforms, are "somewhat cheap," in a report to investors released on Feb. 29. In fact, he calls the Magnificent Seven group of stocks "in aggregate fairly priced" and doesn't see U.S. markets in general in a bubble.
"When I look at the U.S. stock market ... it — and even some of the parts that have rallied the most and gotten media attention — doesn't look very bubbly," he said.
Sizing Up The Magnificent Seven
Seeing Dalio support the seemingly rich valuations of the Magnificent Seven is somewhat surprising.
As a group, the seven stocks, Microsoft, Apple, Nvidia, Amazon.com, Alphabet, Tesla and Meta, jumped nearly 14% just this year on average. Given the massive size of these companies, they've added $1.2 trillion in market value just this year.
The only Magnificent Seven stock Dalio is cautious on is Tesla. He called it "somewhat expensive."
Some investors might think the meteoric rise of the Magnificent stocks is a warning. But that's how markets work. A few chronically undervalued stocks drive a bulk of S&P 500 returns, says Nick Colas at DataTrek Research.
"Academic work shows that just 1% to 2% of stocks created all the growth in aggregate U.S. and global equity values from 1990 to 2020," Colas said.
Not Seeing An S&P 500 Bubble
Dalio assesses the U.S. market using a matrix of six measures for signs of a bubble. None are at extreme highs, he says.
Broad market sentiment, the use of leverage to invest and buyers making extreme futures markets gambles due to rising prices are all low. Investor sentiment toward stocks is only "neutral to slightly positive," Dalio said, not bubbly. Dalio's leverage gauge is healthy, at only a 23rd percentile level. And companies making investments now to lock in ahead of price rises is only at the 38th percentile.
Stocks pricing in perfect future opportunities and new stock buyers jumping into investing is only "somewhat frothy." Valuations reflect reasonable growth forecasts, he says. Meanwhile, trading activity of newbie investors is just in the 55th percentage, much lower than the 90th it hit in 2020 during the meme stock mania.
The only measure that's frothy is how high stock prices are compared to traditional measures. Stocks in the S&P 500 sport valuations in the 73rd percentile. That's high, but not at the 90% or higher seen in past bubbles.
So if you're afraid of buying into a bubble, Dalio at least doesn't agree.
Dalio's Look At Magnificent Seven
| Company | Ticker | YTD % ch. | Dalio's value reading (higher is cheaper) | Sector |
|---|---|---|---|---|
| Alphabet | -1.57% | 0.81 | Communication Services | |
| Meta Platforms | 38.14% | 0.70 | Communication Services | |
| Amazon.com | 15.33% | 0.27 | Consumer Discretionary | |
| Nvidia | 60.85% | -0.10 | Information Technology | |
| Microsoft | 9.24% | -0.14 | Information Technology | |
| Apple | -6.35% | -0.40 | Information Technology | |
| Tesla | -19.06% | -0.88 | Consumer Discretionary |
