Are we in a bubble? That's the returning question when there's a bull market. A vertigo of heights that begs the question. The current period has all the hallmarks of a bubble: a sharp rise in indices, significant expansion in multiples, and of course a technological revolution that will change the world (artificial intelligence). In each case, over-anticipation of the growth and consequences of new technologies. Each time, entrepreneurs, analysts and managers explain that this time it's different. A phrase that normally sounds like a red flag. But what if it really is different this time?

Since its low point in October 2022, the S&P 500 has gained over 60%. 7 stocks have accounted for most of the rise: Apple, Meta, Microsoft, Amazon, Alphabet, Nvidia and Tesla. This group, commonly known as the Magnificent 7 (or Mag Seven for those in the know), has been driving the US market for even longer, with a performance of over 50% in 6 of the last 8 years.

BofA

This performance has led to these stocks gaining more weight in the indexes every year. These 7 companies now account for 35% of S&P 500 capitalization. This concentration in the indices reflects a concentration of profits.

Cash machines...

Tesla aside, these companies are cash machines. By 2025, Apple, Alphabet, Microsoft, Amazon, Nvidia and Meta are expected to generate 472 billion in free cash flow. To quote an unnamed analyst: "free cash flow never lies". And it's this earnings power that must be set against the rich valuation (forward P/E of 33, excluding Tesla). Here again, this handful of companies with high multiples largely explains the high valuation of US indices. A rich but not excessive valuation.

All the more so as growth is on the cards. Despite a market capitalization of between $1.4 and $4 trillion (come on, Apple), the earnings growth of the Magnificent 7 expected in 2025 (+21.3%) is higher than that of the 493 other S&P 500 stocks (+13%). The example of Nvidia is striking. While the champion of AI chips is already worth over 3 trillion on the stock market, earnings per share are set to rise by a further 138% next year, after 586% this year. All this with indecent margins (61% EBIT margin), symbols of Nvidia 's domination of its market.

Source: Factset

...and a wall of investment

This level of profitability is theoretically unsustainable. Firstly, because it is the result of quasi-monopoly situations. Monopolies are bad for the economy as a whole. Sooner or later, regulators will have to dismantle them. On the other hand, abnormally high profits drive other companies into a market. Eventually, competition must normalize them.

All this is theoretical. In reality, the United States is not going to dismantle its technological champions to leave the door open to its Chinese competitors. And Nvidia 's stratospheric margins are linked to a technological lead that is very difficult for its competitors to catch up with.

With just over $250 billion in Capex (capital expenditure) planned for 2025 and even more for the following years, the tech giants have no room for error. The challenge of the coming years will be to monetize AI solutions. A "make or break moment" for the most profitable companies in history. No one can say we're in a bubble until it bursts. But if we are in a bubble, it's a profit bubble.