Two companies – Nvidia and Microsoft – each are worth more than $4 trillion. Together, that’s more than India’s and Japan’s combined annual output. Price is what you pay, as Warren Buffett put it. Value is what you get. Our question for today: how much value will investors get from the Magnificent Seven?
Our Law of Conservation of Value tells us that prices cannot stray too far or too long from value. And value depends on output. Investors ought to be able to look to a future stream of income and from it earn their money back, and more. Even in the dotcom bubble in 1999, the top firms were not as valuable or as concentrated as they are today. Nvidia, Microsoft, Alphabet, Apple, Meta, Tesla and Amazon – together, these firms make up a third of total US stock market value, an amount roughly equal to China’s GDP.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
We don’t know how reliable or meaningful these figures are. What we do know is that they aren’t very impressive. As in the dotcom boom of the late 1990s, AI is not paying off. Huge investments are being made in the hope of creating AI-based wealth. But so far, the output doesn’t measure up.
You can go to ChatGPT, for example, and pay for the service. Many people use it occasionally – including us. But few pay for it – also including us. This would be fine, except that so much investment has gone into AI development that anything less than spectacular results will look like failure. One estimate, from Goldman Sachs, showed that the Magnificent Seven big tech stocks would have to produce $600 billion in extra annual revenue to make sense of their investment.
How will the AI boom end?
The appeal of the dotcom era was the idea that more information would lead to higher GDP growth rates with less need for capital investment.
Costly trial-and-error expansion would be replaced by less costly, more precise, knowledge-driven growth, or so it was believed. It didn’t work out that way. Productivity and growth rates generally softened throughout the 21st century. Capital investment went down. The internet/information revolution did not compensate for the decline; it seems to have made it worse. In the last half century, the rise in labour productivity in developed economies has declined from about 2% annually in the 1990s to 0.8% in the last decade, says the OECD think tank.
Will that change with AI? Probably not. The defining curse of the information revolution was too much information. It piled up. It got distorted and misinterpreted. It took time and money to store and sort. Much of it was false or useless. Now cometh AI, adding to the problem. Which leaves, at least for now, AI and the Magnificent Seven in an old-fashioned bubble. Stock prices are far higher than actual sales and profits can account for. So one way or another price and value will have to come back together. Some breakthrough might lead to a big burst of gains and growth. More likely is that stock prices will fall.
For more from Bill, see bonnerprivateresearch.com
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
How to shield your money as Reeves refuses to rule out income tax hikes and warns of ‘necessary choices’Chancellor Rachel Reeves appeared to lay the groundwork for higher taxes in the Autumn Budget on Tuesday morning and refused to stand by her manifesto pledge not to increase income tax.
-
UK state pension is least generous in the G7 – how do other rich countries compare?British retirees get substantially less in state pension than in other wealthy nations, and for fewer years, but the balance is a lower tax burden on working age people
-
The Stella Show is still on the road – can Stella Li keep it that way?Stella Li is the globe-trotting ambassador for Chinese electric-car company BYD, which has grown into a world leader. Can she keep the motor running?
-
Global investors have overlooked these solid stocks going for growthOpinion Nisha Thakrar, investment specialist at Nedgroup Investments, selects three undervalued stocks with long-term growth potential
-
LVMH is set to prosper as the wealthy start shopping againAfter two years of uncertainty, the outlook for LVMH is starting to improve. Is now a good time to add the luxury-goods purveyor to your portfolio?
-
Japan is still rising to new highs – here's how to investOpinion Political ructions in Japan are no obstacle to gains, and the return of inflation may even benefit stocks, says Max King. What is Japan doing right?
-
Investors need to get ready for an age of uncertainty and upheavalTectonic geopolitical and economic shifts are underway. Investors need to consider a range of tools when positioning portfolios to accommodate these changes
-
Investing in UK universities: how to spin research into profitsUK universities are a vital economic asset, but they are also Britain's 'equivalent of Gulf oil.' There are opportunities here for investors
-
AI is a bet we’re forced to makeIt’s impossible to say yet if AI will revolutionise the world, but failure would clearly be very costly, says Cris Sholto Heaton
-
The MoneyWeek Wealth Summit 2025: how to invest for a volatile eraMoneyWeek's 25th birthday conference’s agenda offers investors a wide array of compelling themes
