opinion:
Uncertainty over the election and the recent stock market rally are concentrated in Big Tech companies that are making worryingly large bets on artificial intelligence, leading to big swings in the stock market in the final weeks of the election campaign. caused.
Please calm your nerves. Stocks are affordable and suitable for long-term savings for common people.
The S&P 500 has a price-to-earnings ratio of approximately 29. The average over the past 25 years is 26. At the peak of the last business cycle in February 2020, it was 27.
Although this is a somewhat buoyant story, the profitability of American companies is clearly increasing.
Annual sales and profit growth rates are expected to be 4.8% and 12.7% in the fourth quarter, and 5.7% and 15.1% in 2025.
If stock prices stall, the S&P's P/E ratio will be below historical norms and many companies' stocks will be undervalued if the rally materializes.
Goldman Sachs caused a stir in October when it published a prediction by Nobel Prize winner Robert Shiller that the long-term outlook for stock prices was bleak, based on the cyclically adjusted price-to-earnings ratio (CAPE). In particular, recent gains have relied too much on the strong valuations of the Magnificent Seven: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.
CAPE is the ratio of average price to average return adjusted for inflation over the past 10 years. As of this writing, that number is around 38, well above the 25-year average of 27.
10 years is quite arbitrary and does not correspond to the average length of a business cycle. The most recent economic expansion lasted 146 months but was snuffed out by the COVID-19 shutdown. The numerator returns in recent CAPE calculations have been depressed by earnings during the pandemic.
MAG7 makes up one-third of the S&P 500 and accounted for about half of the index's gains this year through the end of October.
Goldman Sachs' argument centers on the fact that large companies have difficulty sustaining significant revenue and profit growth over long periods of time. If a company dominates a market and then attracts the attention of competitors and antitrust regulators, there is no room for new customers.
The Nvidia graphics chip that underpins the AI chip is a special-purpose semiconductor called a graphics processing unit (GPU), as opposed to the central processing unit (CPU), which is the brain of a personal computer.
AMD is launching its own GPUs to compete with Nvidia.
Broadcom is the leading designer of application-specific processors and is working with OpenAI to develop specialized chips that perform inference functions (running AI agents trained for specific tasks).
None of these companies are included in MAG7. The important point is that technologies that power AI will create stronger growth and opportunities for others.
Companies to watch in the technology space are those developing AI agents (specialized programs that can perform functions such as those of travel agencies or load and grid management for power companies).
Salesforce and Adobe are well-versed in such business applications. These are notable companies, as are the dozens of startups in the hands of entrepreneurs who haven't yet reached our radar screens.
In all of this, we need to ask what the potential for broader GDP growth and new profitable enterprises is across the economy.
Since 2016, the U.S. economy has grown at an annual rate of 2.5%, well above the long-term pace of 1.8% envisioned by policymakers at the Congressional Budget Office and the Federal Reserve.
Spending on AI equipment and services is estimated to increase from $185 billion last year to about $900 billion in 2027, with labor productivity likely increasing by 1 percentage point per year.
Many jobs will be created and destroyed, but the economy is poised for a growth trajectory closer to 3% than 2%, and it's not just the businesses we know.
Only 51 of the companies on the Fortune 500 list in 1955 have remained on the list every year since then. Where was MAG7 at that time?
According to Goldman Sachs analysis, the expected return on 10-year U.S. Treasuries is higher than stocks.
In September 2021, CAPE calculations were giving a similarly bearish signal for the stock.
Since then, the S&P 500 is up more than 25%.
Over the past 25 years, the average returns for the S&P 500, 10-year Treasury bonds, and real estate (single-family homes) have been 9.1%, 3.8%, and 5.2%.
If you think you can choose your next Nvidia, you should definitely consider it. However, history teaches us that it is difficult to find a unicorn before the horn appears.
My advice remains the same. It's best not to overinvest in your home until you're nearing retirement or need the money for other purposes, such as your children's school fees. Set aside enough funds to weather money market emergencies and staggered maturity fixed income assets such as Treasuries and CDs, and invest the rest in a diversified portfolio or index funds, especially IRAs and similar tax-sheltered accounts.
• Peter Morisi is an economist and professor emeritus of business at the University of Maryland and a national columnist.
