So much of the stock market is riding on AI that if reality comes up short of the propaganda (and it’s hard to see how it won’t), it will crash the market. From Chris MacIntosh at internationalman.com:
The US equity market is a bubble. Here is why:
In my mind, to be defined as a “bubble” the potential for a sudden “pop” needs to be there. No matter how you define it, the probability of an extremely large drawdown in the S&P 500 has exponentially increased in the past few years.
This doesn’t mean it is a high probability — it just means the tail has gotten much fatter. The main reason for this is index concentration is now being coupled with earnings concentration.
Firstly, passive investing has clearly contributed to the top market caps consistently outperforming over the past decade. Passive is inherently pro-momentum. As these stocks were rewarded, it became easier for the companies to use their balance sheet for buying up competitors, seeking top talent, cheap access to debt so they could buy back more shares, etc. It has been a snowball of positive forces for the big tech space in the past 15 years and FLOWS have been a big part of it.
However, what has notably changed in the past few years is that their actual earnings have become much more correlated. Yes, Google and Meta at the end of the day are ad companies. Those ads are seen on the screen of an iPhone. They feed Amazon orders. And all of that runs on the cloud behind the scenes. So in a way they have always had very correlated earnings growth, but now they are intertwining even more. Headlines from the past 12 months to give a taste:
- NVDA to invest up to $100 billion in OpenAI in AI infrastructure tie-up
- MSFT, NVDA among backers as OpenAI closes $6.6 billion funding round
- AMZN pumps additional $4 billion into Anthropic
- META makes $14.3 billion bet on Scale
- META to spend “hundreds of billions” on AI data centers
- Apple, Nvidia in talks to join new OpenAI funding round
- Oracle, OpenAI, SoftBank partner on “Stargate” AI infrastructure JV
AI=the audacity of hype.