To The Moon

I’ve laid out how consumer spending is at least softening and the labor market is weaker than it appears.

At the same time, the stock market’s strength is driven by artificial intelligence. Does this make sense? And what happens next?

There’s no doubt AI spending is growing as $Meta Platforms, Inc.(META)$ $Microsoft(MSFT)$ $Alphabet(GOOG)$ $Alphabet(GOOGL)$, and others invest tens of billions of dollars in AI. $NVIDIA Corp(NVDA)$ CEO Jensen Huang has said trillions of dollars will need to be invested in AI infrastructure over the next decade.

We’re talking about big money here and right now there’s no payoff for investments. I see two potential outcomes.

1. The impact of AI is real and the first impact will be making companies more efficient. This means job cuts before we see any transformative innovation (which may be years away).

   1. In other words, success in AI will make the overall economy worse short term and potentially lead to a recession while continuing to benefit a very small number of companies.

   2. I don’t know what this would mean for markets, but the bifurcation you see in the first chart above could persist.

2. AI is a bubble and we see big tech and VCs pull back on AI investment starting later this year or in 2025. This would result in the unwinding of the outperformance of stocks like NVIDIA, $SUPER MICRO COMPUTER INC(SMCI)$ , Microsoft, $Apple(AAPL)$ , and others who have driven the market higher in 2024.

   1. This could result in a falling stock market, but not a recession, similar to the correction in 2022 that saw SaaS stocks drop and layoffs in Silicon Valley, but didn’t impact most of the economy.

Neither outcome seems great, depending on where you sit.

What I see right now is an AI bubble driven by the investments made by a handful of companies — Microsoft, Alphabet, Meta, etc — in computing to own a market that has yet to show long-term value. VCs have added fuel to the fire and so have public market investors willing to pay ever higher prices for any stock with AI attached to it.

Eventually, even AI comes back to dollars and cents and ultimately consumer spending and if consumers are being pinched by inflation and a sagging labor market I’m not sure how AI is going to help.

As earnings season begins this week, keep an eye on the difference between consumer strength/weakness and AI hype.

After the reports from Goldman Sachs and Sequoia, it looks like Wall Street is ready to turn its back on AI and that’s a warning sign for some of the highest-valued stocks in the market.

https://asymmetric-investing.beehiiv.com/p/something-smells-fishy