An Important Warning To Mr. Market

seekingalpha06-25

The S&P 500 and NASDAQ have surged since the beginning of 2023, up 45% and 82% respectively over that span.However, I have some significant concerns about the forward outlook due to several major ...

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After struggling for much of 2022, since 2023 began, the S&P 500 is up by about 45% and the NASDAQ is up by a whopping 82%. Data by YCharts However, I believe that Mr. Market has become too optimistic and investors would be prudent to take caution. In this article, I will discuss what has been fueling the market's incredible run over the past 18 months and why investors in VOO may want to become increasingly cautious here. Why The Market Is Soaring Right Now What has been fueling this phenomenal bull run?","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BOXX":"ALPHA ARCHITECT 1-3 MONTH BOX ETF","IVV":"标普500指数ETF","XLU":"公共事业指数ETF-SPDR","GOOG":"谷歌","GLD":"SPDR黄金ETF","IE000KEQY171.SGD":"PIMCO BALANCED INCOME AND GROWTH \"M\" (SGDHDG) INC","META":"Meta Platforms, Inc.","GOOGL":"谷歌A","IE0034235188.USD":"PINEBRIDGE GLOBAL FOCUS EQUITY \"A\" (USD) ACC","AMZN":"亚马逊","PSQ":"纳指反向ETF","TQQQ":"纳指三倍做多ETF","LU0820561818.USD":"安联收益及增长平衡基金Cl AM DIS",".SPX":"S&P 500 Index","SDS":"两倍做空标普500ETF","LU1804176565.USD":"EASTSPRING INV GLOBAL GROWTH EQUITY \"A\" (USD) ACC",".IXIC":"NASDAQ Composite","UPRO":"三倍做多标普500ETF","QID":"纳指两倍做空ETF","MSFT":"微软","OEX":"标普100","LU1861559042.SGD":"日兴方舟颠覆性创新基金B SGD","IE00BJJMRX11.SGD":"Janus Henderson Balanced A Acc SGD","VNQ":"不动产信托指数ETF-Vanguard","PLTR":"Palantir Technologies Inc.","LU0823411888.USD":"法巴消费创新基金 Cap","NVDA":"英伟达","LU0889565833.HKD":"FRANKLIN TECHNOLOGY \"A\" (HKD) ACC","SGOV":"iShares 0-3 Month Treasury Bond ETF","TSLA":"特斯拉","SSO":"两倍做多标普500ETF","QLD":"纳指两倍做多ETF","LU0082616367.USD":"摩根大通美国科技A（dist）","SH":"标普500反向ETF","AAPL":"苹果","SLV":"白银ETF(iShares)","SPXU":"三倍做空标普500ETF","IE00BMPRXN33.USD":"NEUBERGER BERMAN 5G CONNECTIVITY \"A\" (USD) ACC","IE00BLSP4452.SGD":"Legg Mason ClearBridge - Tactical Dividend Income A Mdis SGD-H Plus","SQQQ":"纳指三倍做空ETF","DIA":"道琼斯ETF","VIRT":"Virtu Financial, Inc.","IE00BZ1G4Q59.USD":"LEGG MASON CLEARBRIDGE US EQUITY SUSTAINABILITY LEADER \"A\"(USD) INC (A)","SPY":"标普500ETF","QQQ":"纳指100ETF","OEF":"标普100指数ETF-iShares","VOO":"Vanguard标普500ETF"},"translate_title":"对市场先生的重要警告","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"XLU":1,"VOO":1,"VNQ":1,"BOXX":1,"DIA":1,"VIRT":1,"SPY":1,"SLV":1,"GLD":1,"SGOV":1,"GOOGL":1,"NVDA":0.9,".IXIC":0.9,"META":0.8,"MSFT":0.8,"AAPL":0.8,"AMZN":0.8,"GOOG":0.8,"PLTR":0.7,"TSLA":0.7,"SQQQ":0.6,"QQQ":0.6,"SDS":0.6,"SH":0.6,"NQmain":0.6,"SPXU":0.6,"MNQmain":0.6,"QID":0.6,"SSO":0.6,"TQQQ":0.6,"UPRO":0.6,"ESmain":0.6,".SPX":0.6,"IVV":0.6,"QLD":0.6,"OEF":0.6,"OEX":0.6,"PSQ":0.6},"content_text":"The S&P 500 and NASDAQ have surged since the beginning of 2023, up 45% and 82% respectively over that span.However, I have some significant concerns about the forward outlook due to several major risks that have emerged.I share my concerns as well as how I am positioning my portfolio right now.   tumsasedgars The S&P 500 (SPY) and the NASDAQ (QQQ) have been on incredible runs lately. After struggling for much of 2022, since 2023 began, the S&P 500 is up by about 45% and the NASDAQ is up by a whopping 82%. Data by YCharts However, I believe that Mr. Market has become too optimistic and investors would be prudent to take caution. In this article, I will discuss what has been fueling the market's incredible run over the past 18 months and why investors in VOO may want to become increasingly cautious here. Why The Market Is Soaring Right Now What has been fueling this phenomenal bull run? Primarily, the fact that artificial intelligence has taken center stage in the global economy. With ChatGPT going mainstream in early 2023, followed by NVIDIA (NVDA) posting blowout results and guidance, the market has fully embraced the AI hype train. Moreover, mega-cap stocks like Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Meta (META), Alphabet (GOOG) (GOOGL), and Tesla (TSLA) - which dominate the makeup of the S&P 500 (VOO) and even moreso the NASDAQ - have all announced significant investments in artificial intelligence, boosting their stock prices significantly as a result. VOO Top Holdings (Seeking Alpha) As someone with a master's degree in engineering with a focus on machine learning, and having done machine learning projects spanning the nuclear, materials design, and agricultural domains, I firmly believe that AI will have a powerful impact on the world's future. The market is certainly on board with this forecast as well, given the massive appreciation that stocks affiliated with AI have experienced. Moreover, it's not just the mega-cap stocks; companies that are a bit less profitable and less established but have meaningful exposure to AI, such as Palantir (PLTR), have also seen their stock prices soar since the beginning of 2023: Data by YCharts One big reason why the market is so excited about AI is that it is expected to be massively deflationary by significantly reducing labor costs per unit, while also increasing the quality of goods and services and reducing human error in production and capital allocation. Additionally, AI is expected to dramatically transform industries like agriculture and healthcare, potentially solving some of the world's most pressing problems, ranging from hunger to developing new drugs and curing terminal diseases, likely resulting in a significant extension of the average human lifespan in the coming decades. Artificial intelligence is also expected to help solve the labor shortage issues arising from the rapid aging of societies across the globe, as robots and software programs will increasingly replace humans in a wide range of jobs. Meanwhile, the US military is turning to artificial intelligence to help it keep the peace against increasingly assertive geopolitical foes. For example, in Ukraine, Palantir's software and the use of autonomous drones are being leaned on to help bridge the gap in manpower and resources between Russia and Ukraine. Meanwhile, in East Asia, the head of US Indo-Pacific Command Admiral Samuel Paparo recently said that he would turn the Taiwan Strait into an \"autonomous hellscape\" if China were to move against Taiwan, as the US invests heavily in developing swarms of autonomous aerial and seaborne drones. Perhaps the biggest appeal of all is the idea that artificial intelligence is expected to give US businesses a huge edge over competitors who do not have access to the same quality of AI capabilities, driving increased prosperity for American companies, workers, and investors over time. This in turn would enable the Fed to potentially cut interest rates, which should reduce pressure on the US Government's fiscal situation as well as on the economy as a whole. Moreover, the large and growing profits of US corporations due to the widespread use of AI would also likely lead to growing tax revenue for the US Government, further alleviating their current budgetary woes. Major Market Risks However, while these are all great aspects of artificial intelligence and paint a bright future for the US and the world in general, there are serious issues that I believe the market is overlooking as it chases after AI. First and foremost, is the fact that all of these things are simply hopes and dreams for the future. Yes, many of them may become reality, but it will be several years before much of this is realized. Meanwhile, there are some very difficult situations that the market will have to deal with. For example, the US economy in the near term is weakening meaningfully, with unemployment rising to about 4%, inflation remaining persistently high, consumer debt soaring, COVID-era savings fully depleted, defaults in the middle-market segment of the economy expected to increase this year, and consumer confidence and spending fading. Additionally, geopolitical risks are immense and could potentially explode at any moment. While the US is racing to prepare its autonomous forces and other deterrence methods, China already has the world's largest naval fleet by ship count and is accelerating its conventional and nuclear force buildup. Some believe it could move against Taiwan as soon as this fall or next year, which would plunge the world into a global depression and likely disrupt the continued development of artificial intelligence across the globe, given Taiwan's critical role in chip manufacturing. Moreover, since inflation has been persistently high, the Fed appears committed to a \"higher for longer\" policy. Even if they do cut rates later this year, it is unlikely to be meaningful, though they will likely have to cave at some point in the next 12 to 18 months to prop up the economy and keep budget deficits from getting too out of control. In fact, unless the federal government adopts a dramatically different course, the budget deficit is going to continue to worsen, potentially crushing the US economy under its weight. Meanwhile, the dollar is increasingly threatened by global de-dollarization, with central banks turning away from dollars and towards gold (GLD) as a reserve. Furthermore, the rest of the stock market has largely been languishing, as the Dow Jones Industrial Average (DIA) has lagged far behind the S&P 500 and the NASDAQ since the beginning of 2023, and it has been even worse for sectors like REITs (VNQ) and utilities (XLU), which have barely been in the green over the past year and a half. Data by YCharts As a result, it is largely just the optimism surrounding artificial intelligence and the prosperity it could bring to society that is keeping the major indexes afloat. That being said, it's important to keep in mind that it's largely only the chipmakers like NVIDIA that are making significant profits from AI right now. All the other AI companies are investing heavily in R&D and building out the infrastructure to run AI applications, but as of yet, many AI applications are still largely gimmicky, and it does not appear that any of these companies will be turning huge profits from their AI products anytime soon. Meanwhile, AI is consuming large amounts of capital at a time when capital is more expensive. This presents a risk that the market seems to have largely ignored. While I do believe that over the long run, most AI investments will be well worth it, it seems to me that the market has gotten ahead of itself at this point. If these AI investments do not bring about major profitability and broad economic positive tailwinds, the market will need to recalibrate its expectations for these companies, likely leading to a steep market decline. This is especially true given that, by nearly every major model, the market is significantly overvalued right now, even as macroeconomic and geopolitical risks are as elevated as they have been for quite some time. Investor Takeaway  As a result of these risks that the market has not priced in, I am more wary than ever about investing in the market, particularly the S&P 500 and NASDAQ, given the heavy exposure to richly valued AI stocks. Consequently, I am very underweight tech and very overweight deeply undervalued defensive stocks, as well as non-correlated investments such as precious metals like gold and silver (SLV), market makers like Virtu Financial (VIRT), and short-term treasuries (SGOV) and cash equivalents (BOXX). Given the sharply inverted yield curve, I am also selling fairly deep out-of-the-money put options secured by short-term treasuries and cash equivalents to further enhance my returns while maintaining a conservative risk posture against potential sharp market pullbacks due to geopolitical and macroeconomic black swan events in an environment where market optimism seems to be (undeservedly) at all-time highs.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":1,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2446025470"}