In the last market commentary, we discussed how AI was moving markets, and over the past few weeks that couldn’t have been more true. The hottest stocks on the way up, CoreWeave and Intel to name just two, have fallen over 50% and the big tech leaders like Nvidia and Google, have given up 16% and 30%, respectively. However, let’s not forget how far and fast these companies went up, and the majority of those affected are still above their April levels. This is most likely a correction in the midst of a secular uptrend rather than the ushering in of a new, prolonged bear market. Google is now trading at just 14 times earnings. I don’t know that I’ve ever seen a PE of 14 on Google before. Bearish sentiment is reaching extreme levels.
The fear story goes like this: AI spending is too high and AI is too powerful. Earnings are still massive and getting bigger every quarter, but the market has turned to punishing the so-called hyper scalers despite their robust earnings because of their enormous capital expenditures. Contrarily, Apple has been rewarded for spending next to nothing on AI infrastructure and instead is relying on renting compute. The second part of the fear story is that AI is so powerful that AI assistants will make software companies and search engines obsolete. A recent AAII (American Association of Individual Investors) survey suggests that nearly half of individual investors expect stocks to fall over the next six months. The AI fears circulating in the media are certainly playing a role in this. The truth is that AI adoption is still relatively low and many people don’t quite grasp what these tools can and can’t do yet. Like other major technologies before it, fear is a natural first response to the initial disruption and change. Under the surface and beyond the mega-caps, software companies that are simply using the tools rather than paying to build them are doing quite well (Zscaler, Appian, Rapid7, ServiceTitan, etc.). The “Saas-pocalypse” as it’s called (meaning the death of software-as-a-service companies) has yet to come for most software companies. Additionally, AI companies themselves are talking about a different kind of apocalypse that could befall us.
Anthropic, the company that makes Claude, is getting ready to come public and issue shares on the Nasdaq. In its 94-page IPO filing it includes existential risks, such as events that all the insurance in the world would not be able to cover, like a swarm of infinitely self-replicating AI agents taking control of the internet. With this level of fear going around it is no wonder that we are experiencing some volatility.
The main takeaway here is that chasing headlines up or down is not an investment plan. Portfolios that are diversified or have above average exposure to sectors that are advancing are doing quite well (energy and dividend payers, for example). Not to mention, most stocks are still in an uptrend and despite the recent selloffs in some big players - the S&P 500 is still just 3.5% off its all-time high. Additionally, banks are still looking good and credit spreads are not blowing out. Before markets really turn south the credit markets almost always sniff it out first. Stocks pulled back a bit this past month, but the preponderance of evidence is still in favor of a bull market.