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Investors should buy the best tech stocks if the market goes into a correction, says Aswath Damodaran.
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The market is ignoring the risk of a “big and global” next year, he said.
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If the crisis hits, investors should buy Magnificent Seven’s shares at a discount, he said.
A market correction is an opportunity to capture the hottest tech stocks, even if valuations already seem sky-high, Aswath Damodaran said.
The so-called Magnificent 7 stocks have pushed the S&P 500 to record highs and stoked fears about concentration risk this year. These companies, which include mega-cap companies like Amazon, Meta and Tesla, account for about a third of the benchmark index.
Damodaran, a professor of finance at NYU, suspects that mood and momentum have become the main drivers for these stocks, with bullish sentiment swamping fundamental considerations. But the huge gains since 2023 cannot continue uninterrupted, Damodaran said, estimating some kind of change in 2025.
“If you think about everything that’s happened since 2008, the one thing that we know almost as a constant, every two or three years, something happens that’s big and global, and I think you have to build that in,” he said in an interview. with BloombergTV. “And the fact that the market isn’t rebounding is a little bit worrying. What happens when you have a crisis like that?”
Still, investors should view any correction as an opportunity to gain greater prominence among the group of high-flying tech leaders, Damodaran said. He noted that the group has become “insanely profitable” and that their market leadership is unlikely to fade away any time soon.
“I would suggest that if that happens, you find a way to add at least one, maybe two or three of these companies because these are such a big part of what drives the economy and the market,” he added to.
Damodaran’s embrace marks a shift from his previous stance on technology’s white-hot trend. In mid-2023, he dumped his stake in Nvidia, warning that the dominant chipmaker was pushing the boundaries of sustainable value investing.
Since then, Nvidia has continued to rake in huge profits every quarter, sending its shares up 179% so far this year. Damodaran considers the company the only company to have made profits from artificial intelligence, given Nvidia’s role in creating hardware for the emerging technology.
However, each of the leading tech companies is a “special” company, he said, pointing to their ability to scale revenue and growth while pursuing AI exposure.
“As a value investor, if you’re thinking, I’ve never seen ATMs as lucrative as these companies are, and I don’t see ATMs slowing down,” Damodaran said.
Read the original article on Business Insider
