UBS believes that the big six firms, by market capitalization on the S&P 500 (SPY) index are relatively cheaper. The firm reasoned that Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Meta Platforms (META), Nvidia (NVDA), and Microsoft (MSFT) may extend its valuation from here.
The six firms account for over 30% of the index. This is triple the weight of around 11% in 2013.
UBS’s comment on valuation relies greatly on the six tech firms reporting outsized earnings per share growth. It requires profit expansion to achieve a 19.1 times P/E ratio. In 2024, the P/E for those firms was 37.8.
Investors need to consider the influence of Tesla (TSLA) stock on the index. The EV supplier has a market size bigger than all of the automobile firms combined. Additionally, Broadcom (AVGO) is an important hardware and software supplier in the AI markets.
AI Bubble Risks
All of the big six firms require AI-related investments to pay off. In the early phases, customers are buying hardware to power the AI service. Demand for AI chatbots may not justify such expenses. In the consumer markets, subscriptions for AI may not accelerate. People may rather buy an Amazon Prime or Netflix (NFLX) subscription instead of paying for an AI service.
