Is There an AI Bubble? The Nifty Fifty Show It Isn’t That Simple

livemint.com:

Is artificial intelligence blowing a bubble? Probably not, but the rally is still risky. Nvidia has become the undisputed leader in a stock market powered by AI hopes. Valuations are lofty for both the U.S.

chip maker and the technology giants that are buying its products to train their AI models—a group dubbed the Magnificent Seven. Some investors worry a bubble may be inflating. The famous “Nifty Fifty" stocks of the 1970s are one guide to today’s hopes and fears.

They were also powerful blue-chip corporations with extravagant valuations. Whether they ended up justifying them is still a matter of debate. In a famous 1998 article, Wharton School professor Jeremy Siegel argued that they did.

A portfolio containing all of them had a lower total return than U.S. stocks overall, he showed, but by a minuscule margin and only relative to the very peak of the market in December 1972. Four years later, Pomona College’s Jeff Fesenmaier and Gary Smith disputed this.

Since there was never an official list of the Nifty Fifty, Siegel included many stocks such as Philip Morris and General Electric, which had price-to-earnings ratios under 25. Defined as the 50 priciest stocks, the Nifty Fifty would have severely underperformed. Some stocks are common to both lists—a group that Fesenmaier and Smith dubbed the Terrific 24.

Had investors split $1,000 equally between them in December 1972, they would now have $95,000 in the bank, following a particularly dismal performance since the pandemic. If investors had instead bought the S&P Composite 1500 index, they would have $185,000. Only four firms in the list—McDonald’s, Eli Lilly, Merck and Texas Instruments—have outperformed the market during this period.