By David Nelson, CFA
How many souls on board? How much fuel?
Those are the questions every aircraft controller asks a pilot after they have declared an emergency. The truth is they want to have an idea of just how bad the crash is going be and how many people might die.
V-Tail Bonanza I was flying loses prop (2011)
As a commercial pilot and one who has had this conversation, I can tell you I don’t want to have it again, but it doesn’t keep me from flying.
Almost everything in life worth doing has risks. Today, if the engine quits. I know where I’m going to put the plane down. Running money. Same thing. When you invest in stocks an emergency can pop up at any moment. What’s your plan B?
Welcome to the Money Runner. I’m David Nelson
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The market concentration is uncomfortable. I get it. You're noticing a handful of stocks dominating index performance and thinking something's off. Well, something is off!
It's not just the market—it's the economy.
The market concentration is being driven by the earnings concentration and as I pointed out in this week’s post Bears Looking for Payback outside a handful of mega cap tech giants, in aggregate the fundamentals just aren’t there.
The market is a reflection of the economic winners and losers, from Wall Street to Main Street, and right now, the most dominant theme in the economy is how every company is going to benefit from the trickle-down productivity promise of artificial intelligence.
Let’s go to the charts
Bloomberg Data
We know that the S&P 500 and the tech-heavy Nasdaq are outpacing mid-caps and small caps, but even within the large-cap index, the gap between winners and losers continues to widen.
Bloomberg Data
In the last four weeks, while the broad indices rose, the percentage of stocks trading above their 200-day moving average continues to fall. Not unprecedented, but certainly a red flag.
Every bull market has corrections, and every investment theme stumbles during the long journey on I-95 North. How you handle the fall matters more than you think. Even bulls like yours truly have to plan ahead.
When the correction in the AI trade comes, it will be dramatic. Talking heads will be screaming, "it's déjà vu all over again." Your favorite financial news outlet will show you comparison charts to the bursting of the internet bubble. Some will hold prime-time specials on how to protect yourself from annihilation.
The truth rarely lives on the extremes, so maybe a more nuanced approach is in order.
First, look at what's driving the sell-off. Is it a statistical reversion to the mean to relieve overbought conditions? That's one possibility, but here's a more likely scenario:
A software company announces they aren't getting the return on investment from their artificial intelligence rollout and decides to reallocate funds.
A major chip manufacturer announces they have to clear some inventory. Trust me, the stocks won't open down 5%. Think 15-20%.
These are possibilities, but until there's evidence to back up those fears, don't convict and sentence your stocks to be banished from your portfolio just because you're afraid of giving back some of the profits.
Nvidia passes Microsoft & Apple as the world's largest company
Bloomberg Data
Nvidia (NVDA) just passed Microsoft (MSFT) and Apple (AAPL) and is now the largest company on the planet. It shouldn't be surprising if it’s the largest position in your portfolio.
Investors went through the same anxiety when Apple passed Exxon (XOM) in 2011.
Bloomberg Data
Apple first hit the $1 trillion milestone in 2018 and crossed $3 trillion five years later. What makes Nvidia’s ascent so remarkable is that its market cap more than doubled last year, and then went on to pass the 1, 2, and $3 trillion milestones in just over 12 months.
Those of us who manage money for a living, we're judged relative to some benchmark. Maybe that's not the way it should be, but that’s the way it is.
For portfolio managers who are market cap-weighted in NVDA, it likely represents 6-7% of the portfolio. If there's a 20% correction, it will cost our funds about 1.3%.
Make no mistake, that would hurt but it’s recoverable. The bigger challenge is that technology as a whole is now 32% of the market, with many stocks exposed to the AI trade. A 20% correction here is real money.
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It’s worse than you think!
How many companies in every industry have mentioned AI in conference calls and how it will benefit their top and bottom lines? How many industries outside of tech are direct beneficiaries of the buildout in AI infrastructure?
Utilities and energy companies will profit as they provide more power to data centers. The industrial sector, as HVAC companies make their fortunes building cooling units for the chips. Even retail, as AI is used to analyze consumer behavior and better design products. Airlines use AI to manage logistics and maintenance programs, and shipping companies do the same.
Let’s not forget artificial intelligence has military applications and someday could easily be in charge of our nuclear arsenal.
In other words, the tentacles of the AI trade touch almost every industry and are now embedded into the future of our society.
NVDA may be the biggest AI stock in your portfolio, but it is not the biggest risk we face.
What if AI doesn't deliver on its promises?
What if the vast infrastructure built around artificial intelligence doesn't yield the expected returns? The consequences would ripple through every sector, shaking the very foundations of our economy. The stocks that have driven market performance could plummet, dragging down indices and investor portfolios alike.
Imagine the panic as companies across industries announce that their AI investments aren't paying off, leading to massive selloffs and a market correction far more severe than anticipated.
The very life blood of our economic optimism hinges on the success of AI. If it falters, the repercussions could be catastrophic, leading to a crisis of confidence not just in the tech sector, but across the entire market landscape. The stakes have never been higher.
The US economy is now inextricably linked to the success of artificial intelligence.
IT BETTER WORK! - Because if it doesn't, the fallout will be unlike anything we've seen.
The Flip Side
What if AI does live up to the hype? The potential for positive impact is immense.
Artificial intelligence could revolutionize healthcare with faster diagnoses and personalized treatments, leading to better patient outcomes and longer, healthier lives.
It could transform education, making high-quality learning accessible to everyone, regardless of their location or economic status.
AI could drive innovation in renewable energy, helping us combat climate change and build a sustainable future.
The successful integration of AI could usher in an era of unprecedented prosperity, solving some of our most pressing challenges and creating opportunities we can't even imagine yet. If AI delivers, it could change the world for the better, making our lives richer, healthier, and more fulfilling.
Like I said. Everything in life worth doing has risks.
The future is uncertain, but the potential for greatness is there. Embrace the possibilities and stay informed. The promise of artificial intelligence is not just about economic growth. It's about the hope for a better tomorrow.
I’m David Nelson and this is The Money Runner.
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The above was taken from the transcript of this week's Money Runner Podcast
Disclosure: "At the time of this article I currently holdshares in some of the companies mentioned as part of investment portfolios in funds I manage for Belpointe. Additionally, I may discuss other securities that are under consideration for future investment; however, discussing these securities is not a recommendation to buy, sell, or hold. My mention of these securities reflects my personal opinion and analysis at this moment and may change without notice. Please remember that all investments involve risks, including the possible loss of principal."
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