Is The A.I.-Pocalypse Near For Tech Stocks? | Fred Hickey
So far this year, the top 10 stocks in the S&P 500 have accounted for more than 76% of the index's gain.
This is the 2nd most concentrated reading for the S&P in the past 20 years.
The highest percentage was 79%, achieved in 2007, right before the Global Financial Crisis.
Are we in a new generative AI-powered Tech renaissance that will continuing driving the markets higher for years to come?
Or are we risking a major market breakdown, putting all our hopes into a handful of companies that can't keep growing at the meteoric rates that Wall Street is expecting?
For answers, we're fortunate today to speak with Fred Hickey, editor of the highly respected newsletter The High Tech Strategist, which Fred has been publishing since 1987.
Fred is extremely worried about the lack of sufficient return-on-investment from the hundreds of $billions currently being spent on generative A.I.
In his estimation, the tremendous valuations currently being awarded to A.I.-related stocks is on par with those of the infamous Dutch tulip and South Sea manias.
He predicts the current situation will end as painfully as those asset bubbles did.
Here are my top takeaways from the interview:
Fred sees a theme of increasing global economic weakness — with the US being relatively stronger, driven mainly by stock and real estate wealth, but with significant financial struggles for lower-income households. He cites a statistic indicating that 60% of US households with a $60,000 income are struggling financially. Retail sales are weak, and when adjusted for inflation, they are negative. Only Walmart is performing well among major retailers, driven by grocery and healthcare sales rather than discretionary spending.
China faces declining home prices, with existing home prices falling by 7.5%. Industrial production and retail sales are weaker than expected, reflecting broader economic challenges. These indicators point to economic struggles in the world's second-largest economy.
Fred highlights the extreme overvaluation of major tech stocks, driven by speculative investments in AI. For example, Nvidia's market cap soared by $1 trillion in one month, and Apple's increased by $700 billion in six weeks despite reporting declining revenues and net income. Apple's stock price increased significantly based on the announcement of AI integration and a $110 billion buyback, even though their actual buyback in the previous year was only $77 billion of a $90 billion announcement.
He expresses skepticism about the long-term value of generative AI, arguing that the massive investments are not yielding sufficient returns. For instance, despite investing heavily in genAI, Microsoft has not gained significant market share in search against Google. Fred states “the honeymoon phase for generative AI is over”, with companies not seeing significant paybacks and now slashing their future spending on genAI.
The market's gains are increasingly concentrated in just a few tech giants. The top 10 stocks in the S&P 500 accounted for more than 76% of the index's gain this year, the second most concentrated reading in 20 years. Fred points out that this is reminiscent of past market bubbles, and current signs — such as more decliners than advancers, poor market breadth, and more 52-week lows than high — point to the current mania nearing its zenith.
Fred predicts a significant market correction, particularly in
overvalued tech stocks. He cites historical declines, noting that Nvidia has previously dropped by over 55% multiple times, including 68% in 2022. He anticipates similar declines, with potential drops of 80-90% for Nvidia if left to market forces, and 50% for other tech giants like Apple and Microsoft due to their inflated valuations.
He advocates for a cautious investment approach, emphasizing the importance of patience and value investing. He suggests speculatively positioning for a potential downturn with long-term LEAP puts on overvalued tech stocks — though he’s allocating a small percentage of his portfolio (less than 1%) to these positions. He also recommends holding a larger percentage in US Treasurys, offering 5.25% yields, to provide liquidity to take advantage of buying opportunities that will emerge after a general market correction.
Fred also favors investing in gold, highlighting that the miners are particulalry undervalued. Margins are improving due to the rising gold price, which increased by $270 this year. For instance, Agnico Eagle's margins are expected to increase by 40%, yet the gold miners have underperformed gold, presenting a significant investment opportunity as they are poised for a potential catch-up.
Fred highly values patience as an investor. He emphasizes the importance of waiting for the right moment to buy stocks, particularly when the market drops and valuations normalize. Fred highlights that it's crucial not to chase high valuations despite the pressure of seeing others get rich quickly. Instead, he advises being patient and confident that value investments will eventually pay off.
For the full interview with Fred Hickey, watch the video below:
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