The stock market has disturbed, irritated, and puzzled investors by rallying this year, and so the “I told you so”s were flying this past week after all three major indexes slumped. But this isn’t the beginning of the end. Stocks haven’t gotten frothy enough.
The
S&P 500
index fell 1.4% this past week, snapping a five-week winning streak, while the
Dow Jones Industrial Average
dropped 572 points, or 1.7%, and the
Nasdaq Composite
declined 1.4%, ending an eight-week winning streak. Yet even after the drops, the S&P 500 remains up 13% in 2023.
It’s no secret what’s driving the gains. The big seven stocks,
Apple
(ticker: AAPL),
Microsoft
(MSFT),
Alphabet
(GOOGL),
Amazon.com
(AZMN),
Nvidia
(NVDA),
Tesla
(TSLA), and
Meta Platforms
(META), are up a market capitalization-weighted average of 25% since the Nasdaq started its run eight weeks ago, and 14% since Nvidia reported blowout quarterly numbers on May 24, boosted by rising demand for artificial-intelligence computing power.
And even in a down week, three of the seven finished the week higher, and all but Microsoft and Tesla outperformed the S&P 500.
It isn’t all AI, says Brian Rauscher, head of global portfolio strategy for Fundstrat. The “magnificent seven,” as he calls them, cut costs to start the year. That is now showing up in Wall Street projections. For the group, earnings estimates for 2023 and 2024 are up an average of 7% and 6%, respectively, over the past few months.
AI is a coming tailwind. “I never use the term AI; I barely know what it means,” he says. But “is this the beginning of a six- to 12-month surge in [estimate] revisions like we saw during the [dot-com] bubble?”
That potential isn’t reflected in stocks yet. Microsoft, for instance, is back to trading only where it was in late 2021, and that’s probably a reflection of current fundamentals, not AI optimism, says Francisco Bido, a portfolio manager at Integrated Alpha. “Microsoft…will be a beneficiary of the AI movement,” he says. “[The stock] has another 20% to 30% in front of it.”
So how will we know when AI has reached bubble territory? Look for the silly acronyms and novel valuation methodologies to begin popping up. That’s what happened during the dot-com boom when investors suddenly paid attention to eyeballs and clicks more than actual earnings and earnings growth. Beware when the talk turns to exaflops to market cap (look it up).
“We’re so early in this phase of FOMO,” Rauscher says, referring to the fear of missing out. “I would not be surprised before year end [to see] a brand-new valuation methodology…some new AI metric.”
There is no guarantee that AI will become everything that investors imagine. But tech doesn’t need that to keep working. With inflation sticky, the Fed might not be done raising interest rates. But that’s a reason to avoid overweighting banks and energy, Rauscher says. Tech should be just fine.
“If you can’t bet on ’em, don’t bet against ’em,” says Rauscher.
At least not until the bubble really gets inflated.
Write to Al Root at [email protected]
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