There’s a bearish signal flashing for the hottest stocks on the market – and it shows there’s a can’t-miss opportunity for investors, says RBA

• The Reserve Bank of Australia said a once-in-a-generation buying opportunity in the stock market is approaching.

• The investment firm cited expectations for poor Big Tech profits over the next year.

• The bursting of the tech bubble means that other areas of the market could see gains as the leadership equalizes.

The hottest group of stocks on the market is flashing bearish signals, a sign that a can’t-miss investment opportunity is on the horizon, according to Richard Bernstein Advisors.

The investment firm has been saying for months that a once-in-a-generation opportunity may finally be within reach, said Dan Suzuki, deputy chief information officer at the Reserve Bank of Australia.

The thesis, which the firm first proposed at the end of last year, hinges on the extreme market leadership of a handful of stocks expanding into the broader market, with stronger gains for the other 493 names in the S&P 500 after a dominant stretch. The so-called Magnificent Seven.

While technology stocks have captured a large share of the market’s gains over the past 15 years, big tech companies’ earnings are expected to slow over the next quarter, Suzuki said.

Of the Big Seven companies — Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta Platforms — only three are expected to achieve earnings growth of more than 25% in 2024, the Reserve Bank of Australia said in a recent note.

This differs from areas such as small-cap stocks, industrials, energy and emerging market stocks, where earnings are expected to accelerate next year.

Meanwhile, valuations and investor concentration in large technology companies appear extreme, even more so than seen in previous stock market bubbles, according to Suzuki. The top 10 stocks in the S&P 500 now account for more than 30% of the index’s total market cap, the largest share seen in more than 40 years:

At that level of exuberance, those companies risk underperforming, prompting investors to jump to other areas of the market, Suzuki said. He pointed to the dot-com bubble that burst in the early 2000s, which was followed by a decade of poor returns.

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“I think you’ll eventually see a bear market,” Suzuki said of big tech stocks in an interview with Bloomberg on Friday. “I’ve gone so far as to say that I think this is a bubble, and I don’t use that term lightly. So this ultimately suggests that there will be a reckoning.”

But this is actually great news for almost every other area of ​​the market, according to the Reserve Bank of Australia, as investors will finally switch to other stocks and send the pendulum swinging in the other direction.

While the Nasdaq collapsed during the dot-com bust, unpopular sectors like energy and emerging markets saw “brutal” returns over the following years, Reserve Bank of Australia founder Richard Bernstein told Business Insider in an interview in December.

The company expects the same phenomenon to occur as extreme valuations for technology stocks appear poised to decline. Bernstein said he thinks Magnificent Seven shares could end up wiping off 20% to 25% of their value over the next decade, while the smaller companies in the Russell 2000 could gain about the same amount.

“I think this is one of those once-in-a-generation opportunities,” Suzuki said.

Other Wall Street experts warned of a big correction coming for technology stocks, which have rebounded to dizzying heights as investors jumped into the hype around generative artificial intelligence. Veteran investing Bill Smead described the Magnificent Seven stock boom as a “speculative orgy” that could soon end, leading to what he described as a “stock market failure.”

Read the original article on Business Insider