AI Stock Bubble? What You Need to Know

Investors, everyone, and I mean everyone with an interest in the stock market is finally talking about “AI” stocks, that’s short for Artificial Intelligence.  You know, computers learning and helping humans make better more informed decisions in the base case scenario.  “Sky net, and computers and robots running the world from the Terminator series in the ultimate bad outcome.  I’m revisiting the topic of market bubbles once again.  Given the stock recent parabolic moves, and the AI bubble we are currently in. yes, I said it, the current AI bubble we are in.

I mean we are in a bubble, aren’t we Chris?  We must be Chris, since so many financial prophets and financial gurus have declared it so.  Be it Jeremy Granthan of GMO for the last 14 years and counting, Cliff Asness of AQR since January 2023, Rob Arnott of Research Affiliates since at least September 2023. I mean they all manage real money for their clients Chris and they are billionaires so they must be smart and right. Yes, Chris? Or be it newsletter and book writers like Harry Dent since December 2008, and 2016, and then again multiple times in 2021 and 2022 calling bubbles, or the “black swan’ shit happens, hedge every month, buy puts and roll them, academic community, we are sure it’s a bubble Chris.

Well, investors, I am here to bring you a definitive guide on this bubble we are in.  So, this is your “AI” stock bubble definitive guide to investing. First here is a truly fantastic table from Michael Hartnett, one of the many investment strategists at Merrill Lynch, outlining a brief history of bubbles in one table.

It’s got them all.  Who can forget the South Sea company bubble in 1720? That was a terrific run back then up 700% in less than half a year.  More recently there have been th Nifty Fifty bubble in the late 60’s, and the Japan bubble in the late 80’s.  But of course, todays bubble is centered around the “magnificent 7” technology stocks and its even narrower tech leadership with AI.

First, I want to come back in the way back machine to? August of last year.  Yeap it was only then that the purveyors of doom were out in mass pitching the coming 2h2023 stock market crash to come.  Remember back then?  The coming October 1987 replay was coming?  Back then, according to the loudest group promoted on TV, the technology “bubble had topped”, we were certainly heading toward a recession and the markets were due to revisit 3600 or even crash below there.  We posted a YouTube video on (August 11^th?) titled Summer Stall comes, no bubble yet, where we first laid out the history of the Dot.com bubble in October of 1998 through 1h2000 in all its data glory. A little quote from that video when the S&P500 was trading at 4465 and our team was messaging a very normal 3^rd quarter downturn was coming and that was all into late October 2023.

“True bubble type equity action, and its popping, in our opinion would come from higher levels in the stock markets, later in the cycle.  In fact, if one is just a chartist, viewing equities as pictures of supply and demand, independent of valuations and fundamentals, and one looks at many of the monthly setups of some recent technology AI stocks and their moves, one might come to the conclusion that “if”, and I do mean “if” we are in an AI bubble, called it internet bubble 2.0, we are only halfway there in time and price.. Toward the end of bubble-like moves, stocks usually move parabolically, meaning each successive month has a higher return than the previous month until buying is exhausted and short selling has collapsed.

Back in August of 2023, there were few if any technology related AI names making parabolic move. The next week I followed it up with a piece titled, “AI Bubble? Or Summer Stall” on August 18^th. Here’s the link to that video. https://www.youtube.com/watch?v=ll5JwjLrtzo I should have been close to 100% sure that we were not in a bubble because that video was one of my least watched videos ever!  I mean if no one is clicking on a video about stock market bubbles and AI, can it really be forefront of most investors mind?

I addressed Presidential stock cycles and the normalcy of 2023 returns based on history. In that video, I even went as far as to call out?  NVDA, yes NVDA and other semiconductor stocks as ground zero for AI bubble talk. Here’s an expert from that piece. Remember investors, I wrote this in August 2023.

“Clearly the semiconductor group, and more specifically NVDA have been a market leader since the market troughed last October (2022).  In fact, the SOX index rally lasted exactly 198 days from Tuesday Oct 13^th, 2022, until month end July (2023) about a month ago.  Now let’s look back to the internet bubble days. I’m sure it will look quite different, yes?  No.  In fact, back then the SOX semiconductor index troughed on Thursday October 8^th in 1998, and rallied for 194 days into? Friday July 16^th, 1999, before topping and pulling back during the 3^rd quarter of 1999.  Here’s that chart with the first-time span marked below. 198 days.

Reminding investors who didn’t study the Dot.com bubble or didn’t live through it, these were the monthly returns of the Nasdaq composite into the internet bubble peak in March 2000.  The Nasdaq had gained over 125% in the year and a half leading up into peak internet bubble and included monthly returns, not annual returns, but monthly returns of 13%,10%, 12.5% 14%,12.5%, 22%, and 19%.

Here are the current monthly returns from the Nasdaq composite and while they are VERY VERY strong the last 18 months, they do not approach the % return of the time period of the Dot.com bubble.  Most likely because our current large cap technology stocks mostly trade at PEG ratios of 1-2x their revenue growth versus the 5-10 x that many stocks reached in 1999-2000.

I have been sharing overlays of the semiconductor index, the SOX index, and a few individual semi stocks on Linked In any elsewhere for upwards of 9 months warning bearish investors of their likely wrong way positioning.  Where do these overlays stand now?  Should you be worried about all of these stocks?

Here’s the Sox index overlay.  The blue line is since October 2022 through about 4 days ago and the white line is the path the index took from October 1998 through late 2000 with the price peak being mid to late March 2000.

Here’s the same overlay of NVDA then and now.  The reason the white line is offset isn’t because I manipulated the data, but rather because NVDA’s stock was not a public company in 1998 and only came public in mid-1999.

And for fun, I’m including a bonus chart of another semi company that’s anticipated to be a big beneficiary of AI in the coming 1 or 2 years.  No, not Intel, but rather AMD.

Here’s that overlay of AMD then and now.

I find this one interesting, because 1- AMD has received material orders for their AI chips and the stock is already working quite well year to date like it did in early 2000.  However, 2- AMD’s management team has previewed exceptionally strong 2h2024 and 2025 orders for their chips driving material revenue and eps expansion that yet to have materialized.  According to this overlay, if history rhymes again, this might be one of the biggest semiconductor stock winners on a percentage basis from here through the rest of the year.  However as always, no guarantees no certainty..

Which brings me to my final point.  Are we in an AI bubble? First no one knows, I mean how do you define a stock bubble? People throw that term around all the time now and rally is it a true bubble. Two, the purveyors of “it’s a bubble talk” have been almost zero help to most investors.  Why?  Because if all the bubble prophets were so smart and sure about it being a stock bubble, why didn’t they play the game?  I keep asking why didn’t they get their clients long early in the bubble process? Make them money, and then pull the rip cord when the bubble was close to its end?  Instead of, as in Jeremey G’s case, calling for a bubble every year for 14 years and claiming you were “just early” not wrong.

Three, while we were confident last summer we were not then in a bubble, but even if we were, you need to be buying weakness in stocks into the late 4^th quarter 2023, 6 to 9 months later and with most of these AI stocks up materially, one should be more cautious about which names one adds to over the next 3 to 6 months. Why, because 4, and this is a huge one, most investors forget that while technology stocks did peak and have very large declines in the 2h00 though 2001, there were many other industries and sectors in the markets that started secular moves up as tech stocks peaked.  While the technology bubble was popping in 2000 and 2001, many other industries and stocks were actually starting to work and outperform.  Looking back, many financial companies did well.  Homebuilders outperformed. Energy stocks had a good run and the “boring” staple names and utilities moved up and to the right as tech stocks sank.

So for now, bubble or not, short term top or not, the gains for stocks in 2024 are likely to extend themselves from 5000-5100 in the second half of the year as the economy remains relatively stable, inflation remains below 3% and the Federal Reserve looks to provide a little support should growth slow too much in the normal seasonally slow summer.

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