Liquidity and AI Drive the Rise of Mega Cap Tech Stocks

By Victor Sperandeo with the Curmudgeon


The S&P 500 and NASDAQ (NDX) 100 have risen to unusual rally dimensions in the current bear market. This has occurred before (in 1930), but it’s very rare. 

Let’s take a closer look at the markets and examine the role of liquidity and AI in driving mega cap tech stocks higher.

Market Recap:

·        Russell 2000 ETF (IWM) made its low on June 15, 2022, at 163.90 and as of Friday closed at 178.15 or 8% above its low.

·        Mid Cap 400 Index Futures (EMD) closed at a low of 2217.40 on 9/30/22 and closed at 2447.50 on Friday or 9.40% above the low.

·        DOW Industrials (DJI) closed at its low of 28,725.51 on 9/30/22 and closed at 33,093.34 on Friday or 13.2% above its closing low.                         

·        NASDAQ 100 ETF (QQQ) low was 259.72 (adjusted close) on 10/14/22 and Friday closed at 348.40 or +34.1% above its low.

·        U.S. Bonds (using the TLT ETF) made its low on 10/24/22 at 92.40 and closed Friday at 101.09 or 8.6% above its low.

·        Gold made its low on 9/26/22 at $1674.2 and closed at $1944.3 on Friday or 13.9% above its lows.

·        CRB Commodity index closed Friday at 288.45, which is only 2.6% above its recent low made on 5/3/23.

Comment and Analysis:

The market gains in 2023 have been due to dominance of eight mega cap tech stocks, which Ed Yardeni refers to as the Megacap-8: Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Netflix, NVIDIA, and Tesla.  Collectively, those stocks now account for 26.4% of S&P 500 (see the two charts below).

The dominance of mega cap tech stocks is reflected in the NDX 100, which is up 31% YTD.  Also, the (cap weighted) S&P 500 has gained 9.53% in price this year vs. a 1.2% decline in the equal-weighted S&P 500!

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Source: Yardeni Research, Inc.
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In sharp contrast, defensive sectors of the market are getting crushed. Electric utilities, telecoms, oil and gas/energy, health care, consumer staples, etc. ALL have negative total returns in 2023!  Normally, those are the stocks that perform best when a recession is imminent.

High dividends stocks are also underwater. The iShares Select Dividend exchange-traded fund (DVY) is down 9% year to date, even though it currently yields about 4.5%. The ProShares S&P 500 Dividend Aristocrats ETF (NOBL), which contains stocks that have raised their payouts for 25 consecutive years or more, is down almost 2%.  

The market’s concentration of strength in just a few highfliers recalls the Nifty Fifty blue-chip era, which preceded the brutal bear market of 1973-74. Moreover, the current market violates one of the famous rules of investing from the legendary Bob Farrell, the former head of Merrill Lynch’s market analysis: “Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.”

Rally in Mega Cap Tech Stocks Driven by Liquidity and AI Hype:

We live in a “globalist world” from a monetary perspective. The major western Central Banks (Fed, ECB, Bank of England/BoE) coordinate monetary policy with each other.

Michael Howell, CEO of CrossBorder Capital, defines liquidity as the aggregate of the major western Central Bank balance sheets.  He called the October 2022 low in the NDX 100, saying it corresponded to the BoE reversal back to QE that saved the UK pension system. In Howell’s view, liquidity dominates stock price movements more than earnings, valuations or anything else. 

Liquidity has a 97.5% correlation with the NDX 100 for the last 10 years, according to Real Vision’s Raoul Pal. That’s higher than the correlation between the 10-year U.S. T-note to the 30 year T-bond, which is ~95% (the correlation between the 10-year T note and the 30-year T-bond can vary over time, depending on how the market perceives the relative risks and returns of those securities).

When liquidity turns up, the assets that do well are large cap tech stocks, bitcoin, and gold.

However, liquidity is not the primary driver for money supply and interest rates, which directly affect the economy.

Perspective on the AI Mania:

A good part of the rise in tech stocks, especially NVIDIA and Microsoft, is due to the perception that generative AI (e.g., Chat GPT from Open AI) will change the world and big tech stocks that have invested in AI will be the big winners.  As a result, AI-related stocks have risen at a blistering pace while the valuation of the mega-cap subset is at a significant premium to the S&P 500. 

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Five AI-exposed mega-cap stocks are between 35% and 167% higher year-to-date. Nvidia (NVDA), the darling of AI investors, is up +167% YTD with a P/E of 203.91.

This is all very reminiscent of the “dotcom” era of 1998-1999, when company after company said how they planned to incorporate the internet into their business causing their stock prices to soar.  Stocks popped 20% or more when they said they’d sell their products on the internet or added “.com” to their names.  As we all know that mania ended very badly.

Previous types of AI/Machine Learning (ML) have been a huge disappointment, based on many years of experience with Amazon Echo, and Google smart speakers.  They seem to get dumber by the day, characterized by “unlearning” rather than “learning.”  They often answer on the wrong device, rather than the one you are talking to.

The Curmudgeon believes that there is significant potential in generative AI, but the extent is unknown at this time.  He has NOT been impressed with Chat GPT, having used it via Open AI and the Microsoft Bing search engine Chat function.


CBO Update to the Budget Outlook: 2023 to 2033

On May 12th, the CBO issued an interim update to the U.S. Budget Outlook 2023-2033.  CBO’s current projections show a federal budget deficit of $1.5 trillion for 2023—which is $0.1 trillion more than the agency estimated in February.   Here are a few salient forecasts:

·        Annual deficits nearly double over the next decade, reaching $2.7 trillion in 2033.

·        Measured in relation to the size of the economy, deficits will grow from 6.0% of GDP next year to 6.9% in 2033—well above their 50-year average of 3.6% of GDP.  That’s a compounded annual rate of 6.1% per year of GDP for the next 10 years.  Of course, no recessions are forecast!

·        The AVERAGE interest rate for the next 10 years runs from 2.7% to 3.2% (this is a joke projection!)

·        Debt held by the public [1.] increases in the CBO’s projections, from 98% of GDP at the end of this year to 119% at the end of 2033.

·        At that time, debt measured as a share of GDP would reach the highest level ever recorded in the U.S. and would be on track to rise even further.

Note 1.  CBO’s “debt held by the public” excludes the Social Security Old-Age and Survivors Insurance trust fund, which holds about $2.7 trillion, or 38% of intra-governmental debt.


Total Deficits, Primary Deficits, and Net Interest Outlays

-Percentage of GDP

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Source: CBO


Upcoming U.S. Economic Releases:

The next important U.S. economic numbers will be ISM Manufacturing index on June 1st, non-farm payrolls on June 2nd, U.S. trade deficit on June 7th, and the May CPI release on June 13th.

Fed Rate Rise or Pause at the June FOMC Meeting?

As of Friday, the CME Fed Watch Tool assigned a 64.2% probability of a 25bps rate rise at the June 14th FOMC meeting.  That’s up from a 23.9% probability one month ago!

Will the Fed raise rates AGAIN with the ongoing regional bank crisis which is far from over?  The macro environment for vulnerable small and regional banks has considerably deteriorated in recent months due to higher interest rates, making it unclear when and how this crisis will end.

Also, the U.S. is facing record bankruptcies!  So far, more than 230 companies have filed for bankruptcy in 2023, according to the latest data from S&P Global, which tallied the figures through April. Many of these troubled companies have debt that is unsustainable.  Thereby, higher interest rates are likely to cause more bankruptcies.

Victor’s Side Note:  

In Germany, the oldest metallurgical enterprise in Europe over 600 years old, the Eisenwerk Erla plant in Saxony, went bankrupt, reports the website. Two more bankrupt enterprises in Germany with more than a century of history are the 150 years old breweries Memminger and Friedenfels in Bavaria. The sources of the problems are most likely the same as those of the Eisenwerk Erla plant.

Germany, the powerhouse of Europe, is now officially in recession!  Many countries will follow.

Cartoon of the Week:

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End Quote:

“Even if the government spends itself into bankruptcy and the economy still does not recover, Keynesians can always say that it would have worked if only the government had spent more.”      Thomas Sowell

Be well, stay healthy, wishing you peace of mind. Till next time…...

The Curmudgeon

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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