Blue Haven

Some signs of froth start to emerge

By February 20, 2024 No Comments

The S&P 500 has started the year on solid footing, rising 5%. The gains in the index are being led by a familiar cohort of large tech stocks. The obvious stand out is Nvidia (NVDA), which is up nearly 50% so far in 2024. Behind the rise: surging revenue growth for AI related offerings from stocks like Nvidia and Microsoft. While revenue growth can be a fundamental reason for a rising market, there also seems to be an element of over-excitement around AI that is undoubtedly contributing to the rising trend.

The Nvidia moon shot

The main sign of froth that we see developing in the market is the moonshot that is Nvidia’s market value. One year ago, this was a company valued at $510 billion. Today, the valuation has shot up to $1.79 trillion! Nvidia has added more than $1.2 trillion in market value in just the last year.

There is no precedent for a company going from a $500 billion valuation to over $1.5 trillion as quickly as Nvidia did. However, there is some recent precedent in terms of absolute value… Microsoft, was worth $1.7 trillion in January 2023 and is now valued at more than $3 trillion, a rise of $1.3 trillion! The worry is that Microsoft is rising in part due to the same AI fueled excitement that is driving Nvidia higher.

Altman goes for $7 trillion

Perhaps the biggest sign of potential froth in the AI arena is the recent fundraising efforts by Open AI founder, Sam Altman. The Wall Street Journal (WSJ) recently reported that Altman is attempting to raise as much as $7 trillion in capital to spearhead AI missioned projects around the world. So much money flowing into one sector would be reminiscent of the huge fundraising that poured into internet start ups in 1999.

Per “The information technology industry raised enough venture capital in 1999 to eclipse the total raised in the 11 years from 1988 to 1998.”

To be clear, Altman hasn’t raised the money he’s seeking YET… but if he does, it could be a sign of peak euphoria surrounding AI.

On a related note, and more of an anecdotal tidbit, was this article in the WSJ that ran the following headline:

The headline is enough to be like, “Okay, wait a second…” The article then went on to discuss the growing popularity of custodial accounts for teenagers. We are big advocates for such accounts ourselves, so that’s not what caught our attention. Rather, the different teenagers they profiled espoused a preference for big tech stocks, like the kinds that are benefitting from the AI boom. The idea that investing is so easy a 13 year old can do it, and all you need to do is buy tech stocks, certainly made our antennas go up.

Lessons from the Fiber Optic Boom

The purpose of this article isn’t to suggest that the market is due for a swift fall. Instead, we hope to bring attention to the fact that the market does become risky if it becomes overly reliant on a single tech related theme or stock. Said differently, if stocks like Nvidia and Microsoft are so crucial to the market’s performance, and they are benefitting exponentially from sentiment around AI, any change in that sentiment could harm investors.

This specific focus on AI related tech stocks also represents why diversification can be frustrating even when it works. If you are not overly exposed to tech stocks like Nvidia, which most diversified portfolios are not, you are not reaping as much of the rewards that these stock’s are providing. On the other end of the spectrum, diversified portfolios have held up much better when prior bubbles have popped (see 2000-2002 or 2008).

All in all, if the AI theme continues to dominate the market and the headlines, it will be cause for concern. We’re not there yet, but it’s worth paying attention to. Now is a good time to check up on your general market exposure and see just how exposed you may be to the performance of the S&P 500 and AI related tech stocks.

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