Teresa Rivas
According to the French novelist Anatole France, a person is never happy except at the price of some ignorance. That might well explain the market today: Anyone bullish looking only at their gains is likely pleased; scratch beneath the surface of the rally, however, and the picture changes.
The S&P 500 notched its 31st record close of 2024 on Tuesday, putting it up 15% since the start of the year. The Nasdaq Composite has recorded 20 record high closings in 2024, and risen 19%. By all accounts investors have plenty to celebrate.
Yet as Mizuho Managing Director Jordan Klein notes "no one on the tech buy side sounds happy."
Like Tolstoy's unhappy families, they feel that way for distinct reasons. As software has lagged, Klein writes that these investors are despairing that any catalyst will appear to draw artificial-intelligence dollars their way. Yet even semiconductor stocks and hardware, which have been drawing the lion's share of funds, have their own woes, given heavy concentration means fewer winners, and encroaching fears that eventually it "will end badly in tears."
Moreover, internet-focused stocks have underperformed recently too, small-caps have been on a roller-coaster ride, and fintech "still feels like a potential minefield for many," Klein notes.
Given all this widespread frustration, investors may be tempted to take their ball and go home, especially if even those on the winning side are fretting about how pricey tech is, and how sustainable the gains are.
However that would be a mistake, says Klein, arguing anyone betting their bottom dollar that AI is at the peak is likely to get burned: "It sure doesn't feel like this AI train is slowing down one bit...I lack any great answer or solution to the craziness. But I would not recommend fighting it and rushing out of these winners like Nvidia, Broadcom, and Micron Technology just yet."
In that, he's echoing the same advice as other strategists, like Trivariate Research, which argued last week that the AI rally is likely to remain " innocent until proven guilty;" or in other words, unlikely to be out steam just yet, with the big winners only likely to get bigger.
Little wonder, as sticking with tech giants has rarely steered investors wrong. "AI adoption is not going to be a straight line," meaning various aspects of tech are "susceptible to mean reversion," notes 22V Research's Dennis DeBusschere writes. "Right now, the first order trades $(NVDA)$ are working the best."
Solita Marcelli, UBS's chief investment officer of the Americas makes much the same point on Thursday.
"AI investment has been led by financially strong companies, with high-quality earnings, strong profitability, and healthy cash flows," she writes. "This financial stability reduces the risk of speculative bubbles, in our view, and it means that megacaps are core to the AI story."
Given she expects vertically integrated oligopolies to dominate the space up and down the supply chain, it's hard to argue against these monolith players' ongoing gains.
The upshot of all this is that investors have legitimate reasons to be nervous, but for now, there's no obvious reason to assume that the music is about to stop.
Write to Teresa Rivas at teresa.rivas@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
June 20, 2024 15:16 ET (19:16 GMT)
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