“You know it’s a bubble when everyone starts telling you it’s not a bubble.”
That’s BofA’s Michael Hartnett, describing the current market zeitgeist.
I’m sure it occurred to Hartnett that his colleagues in equity derivatives published a piece this week called “Volatility suggests AI isn’t a bubble…yet.”
I editorialized around that piece (the derivatives note) mid-week. Long story short, in the lead-up to burst bubbles, volatility tends to rise with the price of whatever it is that’s experiencing a bubble. That’s been true whether it’s equities, gold, oil or crypto.
The figure above shows the ratio of realized vol at “peak bubble” versus vol at the beginning of a given frenzy. Although big-cap US tech has seen higher vol on up days than down days over the past 18 or so months (indicative of froth), BofA’s team suggested there’s scant evidence in the volscape currently to suggest the AI trade’s perilous.
Hartnett didn’t make any specific claims as to whether he does or doesn’t think AI’s a bubble. But he did trot out some statistics which perhaps speak to his otherwise unspoken opinion on the matter.
“[The] S&P 500 is up 12% YTD, ex-NVDA it’s up 7.9%, ex-‘Magnificent 7’ up 4.9% and ex-‘AI Big 10’ up 3.6%,” he wrote. (The sarcastic among you might quip: “If you exclude everything that’s up, stocks are down!”)
For those curious, Hartnett’s “AI Big 10” is the Magnificent 7 minus Apple and Tesla, plus Broadcom, Qualcomm, AMD, Applied Materials and Micron.
As you can see from the chart, that group’s share of S&P market cap is now approaching 30% after running from $5 trillion to $13 trillion in the short space of 16 months. Total “AI Big 10” revenue has more than doubled over the same period.
Nvidia’s added $1.78 trillion of market cap this year alone. Jensen Huang was worth a lowly $14 billion at the beginning of 2023. That made him a relative pauper in the context of Bloomberg’s billionaires list. Now, he’s number 13 on that same list, worth more than $105 billion. Congrats, Jensen: You’re a centibillionaire.
Hartnett offered a second description of the zeitgeist in addition to the one quoted here at the outset. As a reminder, Hartnett’s “zeitgeist” descriptions take the form of conjectural “quotes” from traders and investors, one of whom “said”: “70% of [my] portfolio I’m clipping 5% cash, the rest I’m just all-in on YOLO AI.”
30 day Vol on MSFT: 18%, AAPL: 22%, NVDA: 48%…market cap weigh those and NVDA shoves the market around. Something should budge- but will it in 30 days?
Some of these statistics are downright scary!
I am curious, however, to see how Nvidia trades on Monday, post split. Also, not sure how the relatively large short position (12% of the float) gets resolved.
A flaw in the note from the BOA’s derivative team, from my perspective (or bias, as I short it), is that the market cap of a single company has never been this enormous. In other words, to support an increase in historical mean volatility, a significant amount of liquidity is required. I doubt this is “fundable,” even in the current QE environment.
Picking a few stocks and saying that they are a bubble makes for an easy headline. But the other commonalities between these stocks is the high barrier of entry for any one that wants to get its share of the business. And that is really hard. Can a monopoly be a bubble ?
These businesses are not monopolies really, but we’ve never seen such large businesses in the past and so I think we have no idea where this is heading. But it seems impossible for any startup to meaningfully challenge any of these businesses in the long run, no matter how good they are at it. One way or another, they’ll get reigned in and swallowed. So maybe it’s not a bubble, not a monopoly, but another form of uncompetitive and hence “artificial” pricing situation.
Yes, I am “extremezing” a little the current situation, but I think it’s not completely off.