The technology-led upswing may have a long way to go this year

To train tools like Chat GPT, Midjourney, Dall-e 2, Bard requires huge computing power. It involves cross-checking 10,000 billion words with respect to many billion different parameters. As it is only Nvidia that can manufacture the very best semiconductor circuits and precisely these are necessary in practice to prepare an LLM, the company currently has unprecedented pricing power. In the current quarter, revenues are expected to increase by 65% at an annual rate and next half year by around 100%. Thanks to higher margins, earnings per share are expected to quadruple over the next two quarters, which chimes well with the stock having just done exactly that.

Nvidia's success has dragged down sentiment for the rest of the Nasdaq, but especially for the largest and most well-established companies. So far, only those who can afford to keep up with the AI race. In addition, it is understandable if investors stick to the stocks that currently have momentum with them. Or, it's not so much about active decisions, but as David Hunter says about an indexing effect. The capital is automatically focused to an increasing degree to the heaviest index components. Even Druckenmiller is on the AI bandwagon. He stated in the interview that the normal thing would be an upward wave that lasts for a couple of years. And then we are talking about the man who made his name with Soros by shorting the Japanese Nikkei at its absolute peak in 1989-1990, as well as losing several billions shorting 12 worthless internet companies just a few months before the Nasdaq millennium bubble burst. Druckenmiller, who obviously knows exactly how to look negatively at expensive hype, still likes AI companies. That's despite him sticking to the scenario of a potentially severe recession starting in late 2023.

Stanley Druckenmiller is clear that he is among the most insecure he has been in a very long time and that he is waiting for better conditions. Perhaps the most important thing for poker players and baseball players as well as investors is to know when to stand over to the next roll. With slightly different scenarios, Hunter and "Druck" agree that fantastic opportunities will be created in the turbulence expected to come. Hunter sees both extreme peaks and troughs in front of him, while Druckenmiller mostly sees something in front of him that is most reminiscent of the last 25 years, i.e. business as usual, albeit quite large fluctuations. Behind the averages, he believes that the individual movements of raw materials, industrial companies, precious metals etc. in the next 1-2 years will give rise to precisely the really fat pitches that have become his signature. Perhaps you can win profits on the way down, but most ordinary savers should probably just try to be ready to buy the dips (without buying out too early).

The economic signals are clearly negative. Falling Consumer Price Index CPI and especially extremely weak Producer Price Index PPI figures from around the world indicate that the unusually expected cross stop will soon manifest. But with a Fed funds rate that has room to cut by 500 basis points and an AI boom that has only just begun, the top ten could continue to lead the index higher. The signals from the stock market are as positive as the signals from the economy are weak.

The top companies are actually not even remarkably expensive if you look at their PEG ratio, i.e. the Price/Earnings P/E ratio related to the growth rate, so it is possible to close your eyes to other key figures and ride the hype for a while longer. But keep in mind that the more robust and historically reliable Price-to-Sales P/S ratio has broken all records, not least for Nvidia, which stands at 40 times the latest annual turnover. By comparison, the stock market average is usually around 1x sales over time, but is now around 3x sales. It can only be justified in the long term with higher growth or higher profitability than the last 100 years, so the rally is unlikely to be sustained. However, that does not prevent Hunter's indexation-driven melt-up scenario that takes the US S&P 500 towards 6000-7000 before the turn of the year from becoming a reality down the road. The stock market is, as is well known, flow-driven, not value-driven.

A positive angle on Nvidia is that in March 2000, Cisco was the world's largest company with its 500 billion dollars in market value. Nvidia ($1T), which is the epicenter of the AI earthquake, is so far only a third as big as Apple ($3T). That I have a little difficulty seeing how Nvidia will maintain its monopoly position and that their customers will continue to be just as eager to pay extra to be the first to train the latest LLM is relatively uninteresting. The question is how long the market believes that. Or, believe and believe... In practice, very few active decision-makers care about values. As said, it is about automatic flows that continue as long as the stock goes up. Druckenmiller has about ten AI holdings. Hunter anticipates melt-up. Everyone is prepared for a recession so it shouldn't be too much of a surprise, and the Fed has loaded the cannon with 500 fresh points to stimulate with if needed.

Once the recession hits, the very cheapest cyclical companies that have already crashed in price will gain new downward momentum: oil shares, fertilizer, mines, etc. And at the same time, the best tech stocks can hold up well or even continue upwards, driven by interest rate cuts, rotation and indexation as well as the pursuit of secular growth and a positive "story". You can choose whether to play the game up then down and then up again and in which sectors, or if you e.g. only aiming to buy cheap in the dips (crash?) ahead. Personally, my main focus for the next ten years is to buy real assets related to energy needs and the green transition, as well as renewed monetary stimulus due to the largest debt mountain in history and budget deficits already during the boom.

The most important thing is to keep an open and balanced mind, ready to change opinion and feet as fast as a ferret as economic facts and market conditions change. Just remember that if you buy cheap, you have time, but if you buy too expensive, you have to take momentum with you or be forced to a stop-loss sooner or later.

Right now the stock market is pointing upwards and there are many indications that momentum may actually increase during the summer. A new all time high for the S&P 500 could be the trigger for an upward acceleration in line with Hunter's scenario. New AI tools and success stories have taken over the media narrative. It will increase in strength going forward, regardless of how useful the tools actually later turn out to be. In the constant balancing act between buyers and sellers, I think it is the blanks that will have to give in this summer. This means that Nasdaq is an advantage for the foreseeable future, while the cheapest companies in oil, mining and banking should be avoided. However, it is among the latter that I will be looking for bargains this winter.