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Zhitong Finance APP learned that the strong rebound of the US stock market in 2024 has led some people on Wall Street to believe that the US stock market may be in a similar era to the Internet bubble. However, the portfolio managers of GMO, a legendary value investor and "bubble prophet" Jeremy Grantham, believe that it is not reasonable to compare today's "Big Seven" with the boom and bust cycle of the late 1990s, because there are not so many factors to worry about in terms of the fundamentals and multiples of these giant technology companies.

In 2000, the median P/E ratio of the top ten U.S. companies by market value was 60 times as investors were "dazzled" by the communications revolution at the time and the group's underlying returns of 22% per year over the previous five years.

GMO calculates fundamental returns for companies based on their dividend income and earnings per share growth. The team estimates fundamental return expectations using dividend yield and consensus earnings growth.

In an optimistic scenario, if the top ten companies could achieve a median basic return of 19% per year starting in 2000 and their stock prices remained unchanged over the next five years, their median P/E ratio could exceed 25 times by 2005.

However, the reality was "quite different", with the median underlying return for the group being a "relatively paltry" 8% per year. "Total returns were very poor, and perhaps not surprisingly, the best performing company in the group - the only one to achieve a positive return - was Exxon Mobil," the portfolio managers said.

Today, the top ten U.S. companies by market cap in 2024 have delivered an impressive underlying return of 19% per year since 2019, but the picture is very different from 24 years ago, with the median P/E ratio today just 27 times, compared to 60 times in 2000.

GMO portfolio managers said that if today's top 10 companies can achieve their expected fundamental returns of 19% per year and prices remain constant over the next five years, their price-to-earnings ratio will fall to 12 times by 2029. "Investors have lower expectations for giant companies now than in 2000. In a sense, the risk is lower today."

“Even if markets superficially look similar from a technical perspective, the short term is unpredictable by anyone,” GMO portfolio managers said. “Whether today’s mega-cap companies become great investments or not-so-great investments in the long term will depend on the evolution of their fundamentals and the resulting impact on valuation multiples.”

U.S. stocks closed lower on Thursday as new data stoked concerns about an economic slowdown. The number of Americans applying for unemployment benefits jumped to a near one-year high of 249,000 last week, while a key factory gauge fell for a fourth straight month in July to an eight-month low.