“This is a very low probability event.”
So said SocGen’s Manish Kabra of a prospective dot-com bubble redux driven by an extension of 2023’s A.I. frenzy.
Wells Fargo’s Chris Harvey, meanwhile, sees some potential for a late-90s rerun unless the Fed causes a recession — inadvertently or otherwise — even as he doesn’t see much scope for additional equity upside in 2023.
Kabra raised his S&P target to 4,300 from 3,800. “There has been strong storytelling and momentum mania, with ‘AI boom’ stocks adding 500pt to the S&P,” he wrote.
The figure on the left above is familiar. There’s a very strong argument that US equities would be flat, at best, in 2023 were it not for the A.I. story.
One of the more incredible aspects of this year’s tech-fueled rally is the suddenness of it all. A.I. isn’t new. OpenAI isn’t new either. The trigger for the excitement wasn’t the apparent step change in the pace at which the technology is advancing, but rather the way in which that step change was communicated to the world — namely by a chatbot accessible to everyone.
Had OpenAI confined accounts of GPT’s capabilities to academic journals or, say, discussed the technology at a symposium somewhere, or even demonstrated it as part of a Microsoft investor event without allowing unfettered access to the golem Sam Altman swears ChatGPT isn’t, the science world might be abuzz, but I can assure you US equities wouldn’t be trading where they are now (assuming no other bullish catalyst). Investors needed to see it and experience it to get excited. Well, they saw it. They experienced it. And oh, boy, are they ever excited.
As the figure above makes clear, the media is excited too. Excitable headlines paired with excitable investors makes for exciting times, which in turn make for more exciting headlines. Until everyone ends up broke. I’m just joking. Sort of. (“Gradually, then suddenly.”)
Kabra thinks the bump will last through year-end. “We believe the A.I. momentum will build further in H2 and the 500pt rise will stay with us,” he said, before cautioning that the S&P could retrace the gains early next year. “The profit margin reversal, credit weakness and sharply rising recession risk will most likely be visible in H1 2024, bringing the S&P 500 back to 3,800,” he wrote. “Ultimately, the new broad-based bull market is likely to start with a mild recession, Fed rate cuts and/or a positive yield curve.”
There is, however, some right-tail risk in the market thanks to the A.I. narrative, and if the Fed were to cut rates at the first sign of trouble in the labor market (so, before they absolutely have to), the right-tail could realize, setting the stage for a monumental rally in equities.
“If the A.I. boom feeds into the market like the TMT bubble, the S&P 500 would likely be around 5,500,” Kabra said, sketching a kind of perfect bullish storm where stocks continue to re-rate on a combination of policy optimism and tech-related euphoria. “This is all based on two elements, a Fed that cut rates soon and an A.I. hype that gets extended from an already steep rise,” he went on, suggesting such a scenario is highly unlikely.
Although Harvey’s 2023 price target is actually lower than Kabra’s updated target (4,200 versus 4,300), Harvey seems to believe that absent a more determined approach from the Fed (to say nothing of near-term rate cuts), the market may be inclined to do its best dot-com impression. “Tech is not going to roll over… until you crack the economy” he told Bloomberg Wednesday. “You need some sort of shock to get us into a recession.”
What if investors don’t care about recessions because everyone is front running the rate cuts (and QE?) that will start as soon as the data weakens?
i think the rally is more attributable to a recovery in earnings. just as the drop was attributable to a drop in earnings. the smart money is really smart at figuring this out. going back to the turn of the century the market started falling when smart money anticipated earnings falling even though consensus still had earning growing. i am amazed how good they are at predicting where actual earnings will be a year from now and acting on it . for instance in oct last year we all thought recession was around the corner and earnings would suffer. but smart money (not me sadly) knew earnings had bottomed and they were buyers. and they were rught as usual.i would give this uptrend a chance to continue until a solid break of the 200 day sma. i would use that as a signal that smart money is bailing. we have been above it long enough that a break would be significant. also the 20 month sma
i was reviewing the big market cap stocks that have contributed most of this year’s gains. some are clearly ai: nvda. msft. goog. crm. orcl
others are not clearly ai plays or had other narratives: aapl. brk (driven by appl). nflx. tsla. meta
what is also interesting is that chat gpt was released on nov 30. but msft goog nvda all fell with the market in december and only took off at the start of the year. remember how goog fell 5% after the bard presentation because of the false answers.
only meta crm orcl seem to have been in rally mode since nov 30. but none of them are associated with chat gpt and most people wouldn’t associate them with ai,
i think a lot of analysts who missed the rally are going sour grapes by calling it retail chasing ai or 0 dte options (a complete nonsense hypothesis) it really doesn’t stand up to scrutiny. it seems like a continuation of the crowding into mega caps that has been going on for years. another example is how jpm has held up while others like bac c wfc and gs have all gotten hit. investors continue to see these big names as quality and keep piling in
H-Man, Harvey clearly doesn’t go to the grocery store. Because if he did, he would be shocked. Pile a couple of items into the cart that barely feed your dog, let alone you, and say goodbye to a Benjamin.