A recent paper by the GMO team compares the ten largest global companies today with those from 2000 from a fundamental perspective. There are notable parallels between the current AI boom and the TMT (Technology, Media, and Telecom) mania that captivated investors 24 years ago. This comparison, often referred to as the NDVA & CSCO analogue, is currently gaining attention.
Today’s top ten largest companies trade at a median P/E ratio of 27, compared to 60 in 2000. They are projected to achieve a 19% earnings growth over the next five years. If market prices remain static and this growth is realised, it would imply a P/E ratio of 12 by 2029. In 2000, a similar growth forecast, which ultimately wasn’t met, implied a P/E ratio of 25 by 2005. The current top companies also enjoy a higher level of profitability and balance sheet strength, placing them in the top 10th percentile, whereas their 2000 counterparts were in the 50th percentile.
Despite these observations, predicting future stock prices remains uncertain. The future composition of the top ten will largely depend on how quickly AI can be monetised, given the significant capital investments currently being made. Investors have found some comfort in the efficient capital allocation by mega-cap growth companies (MGCs) up to now. However, recent disappointing results from major tech firms have caused concern among investors about whether this trend will continue.
This anxiety is amplified by a rapidly changing investment landscape, marked by unexpected central bank decisions, a major unwinding of carry trades in the Japanese yen, renewed fears of recession in the US, and escalating geopolitical tensions in the Middle East. Given these factors, it is likely that the earnings results and guidance from NVDA, expected in late August, will be among the most eagerly awaited in corporate history.
The comparison between today’s largest companies and those from 2000 reveals significant differences in valuation and financial strength. However, the path forward remains unpredictable due to various global economic factors and the unfolding impact of AI monetisation. Investors and analysts will be closely watching upcoming earnings reports, particularly from major tech firms, to gauge the future direction of the market.
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