Over the past 10 months, Berkshire Hathaway has been increasing its cash reserves. Currently, it holds a record $189 billion in cash.
The legendary investor made several high-profile acquisitions after the burst of the dot-com bubble in 2000, showcasing his market prediction acumen. At that time, he significantly increased his holdings in American Express, from 50 million shares in 1999 to 152 million shares in 2001. Additionally, between 2000 and 2003, he completed several acquisitions, including eight deals in 2000 alone, totaling about $8 billion.
Currently, the U.S. stock market is led by seven high-tech companies: Microsoft, Apple, NVIDIA, Alphabet, Amazon, Meta, and Tesla, collectively known as the “Magnificent 7 (M7).”
The market’s frenzy over these high-tech and AI stocks inevitably reminds investors of the dot-com bubble more than 20 years ago. Since last year, some have expressed concerns along this line, with U.S. market forecaster Gary Shilling reminding investors to prepare for an upcoming recession and boldly predicting that the stock market could plunge by as much as 30 percent this year.
As of November 2023, the market capitalization of the M7 has increased by about $5 trillion compared to the beginning of the year, reaching $12 trillion. The Nasdaq’s total market capitalization increased by about $6 trillion, indicating that Nasdaq’s performance in 2023 was almost entirely supported by these seven high-tech companies. Additionally, the M7 accounts for 30 percent of the S&P 500 index, and their fluctuations significantly impact the overall stock market index.
This phenomenon inevitably reminds investors of the dot-com bubble crisis in 2000. The market value of the leading tech companies at that time—Microsoft, Cisco, Intel, Oracle, IBM, Lucent (now Nokia), and Nortel Networks—accounted for about 19 percent of the stock market.
Given that the current Nasdaq market performance is primarily driven by the M7 high-tech stocks, investors are beginning to analyze the similarities between now and the 2000 dot-com bubble.
Fed’s Rate Cut Schedule Keeps Markets in Suspense
The future direction of the stock market and other capital markets, as well as the real economy, will be influenced by the Federal Reserve’s rate cut schedule and frequency. However, the Fed has yet to provide a clear answer.QT is a monetary policy where central banks reduce the money supply by decreasing their holdings of financial assets, like government bonds and mortgage-backed securities. Instead of reinvesting the proceeds from maturing securities, the central bank lets them expire, shrinking its balance sheet. This process tightens financial conditions and can lead to higher interest rates.
Since the Fed started this rate-hike cycle in March 2022, it has raised rates 11 times in just 16 months, with a cumulative increase of 525 basis points as of July 2023. Currently, interest rates are at their highest level in 22 years and have been maintained for about 10 months. The market had anticipated three rate cuts in 2024, but these have been delayed multiple times.
When will the rate cuts happen? Will current AI stock prices experience a burst similar to the 2000 dot-com bubble when rates are cut? These questions are closely watched.