If you asked me at the end of December whether I thought the S&P 500 would be up ~10% at the end of the first quarter this year – I would have said “unlikely”. And yet here we are. With the promise of (coming) interest rate cuts and continued strong economic growth (implying growth in earnings) – US equities have arguably exceeded most analysts full year targets. For we have already exceeded all but 1 of 18 full year S&P500 forecasts “experts” made at the beginning of the year.
A Different Lens on the ‘AI Bubble’
25 years ago Cisco (CSCO) was the largest company on the S&P 500 by market cap. Its shares soared on the demand for networking equipment. But it didn’t last. The stock lost 89% of its value in two years. Nvidia is not only charting a very similar technical pattern to CSCO – there are also similarities with valuation metrics. Both the price-to-earnings ratio and price-to-sales multiples have been very similar. What we don’t know (or cannot know) is whether the same fate lies ahead for NVDA (as investors pay a staggering 35x sales for a slice of the AI pie)
Are Semi’s Set to Cool their Gen-AI Heels?
Whilst the technology sector is outperforming the benchmark index this year — semiconductor stocks have done the bulk of the heavy lifting. And it’s not difficult to explain investor FOMO. It’s entirely due to the hype around “AI” and specifically something called “Generative AI”. For example, in a report by Grand View Research, they valued Gen-AI at ~$13B last year. However, its anticipated CAGR is estimated to be ~36% – which puts the industry hitting $109B by 2030. That’s a sharp ramp higher from basically zero two years ago. And today – there a very few chipmakers who produce the GPUs required to meet the insatiable demand. However, is the demand semis are seeing today (and revenue) sustainable long-term? That’s unlikely.
Something Doesn’t Add Up…
It’s Nvidia’s world and we’re living in it (if you believe the stock market). The S&P 500 (and Nvidia) recorded all new highs post the AI chip maker’s earnings. Be careful paying too much. The rapid rise in Nvidia’s market cap has only seen the market narrow further. And from mine, that makes it more subject to both volatility and risk. Deutsche Bank’s Jim Reid dimensioned the risk another way. He shows how the Top 10% of stocks in the S&P 500 constitute ~75% of the total capitalization. We have not seen that since 1929! The only other time we saw something similar was the dot.com bubble…
For a full list of posts from 2017…