AI Robot

AI = All-In

A busy week of earnings reports as the market got a break from the economic data and Fed speak. As you can see in the chart below of the S&P 500, the market likes what it is hearing from corporate America.

Chart of the S&P 500.

Prices are extending to new highs and are now in overbought territory. However, markets can get pinned in an overbought condition IF they begin to trend and grind higher. As you probably know, there have been a handful of mega-cap technology stocks driving the indices higher so if market breadth improves then this uptrend could go on for much longer than most are predicting. That would be the surprise.

Surprises, Surprise

FFR Expectaions

Turns out markets frequently get their expectations pointed in the wrong direction. The biggest buzz in the news media for months has been about the number of rate cuts in 2024. And now many economists are walking back their predictions based on the strength of the jobs market and sticky inflation.

You can see in the above graphic how the market often gets the path of interest rates wrong. Notables are the 2010 era and the most recent expectations for 2024 on the far right. In most cases, when the Fed eases the stock market does poorly as it typically precedes a recession. So, unless the economy falls off a cliff in the next 90 days, the Fed may sit on the sideline for most of this year (that would be a surprise) as labor demand and corporate profits look OK.

Artificial Intelligence

The usage of artificial intelligence is starting to show up in the real world. Data centers, network providers and semiconductor companies are seeing revenue growth as hardware and software needs to be upgraded to handle the processing power tied to artificial intelligence usage.

As you can see in the line chart below, there are varying degrees of performance in the stock market right now. Notable is the Russell 2000 (small caps) which is lagging and on the other end of the spectrum is the semiconductor ETF SOXX which is pulling the markets higher.

Relative Performance

On Steroids

The strength of the semiconductors is impressive and the next chart shows two companies at ground-zero of the AI boom – NVIDIA and Super Micro Computer. Both are far outperforming the SOXX ETF at the bottom of the chart.

NVDA/SMCI

These charts are reminiscent of 1999 but many of the companies in that era never realized the revenue or profits expected as many business models were built on a promise. Not the case today as evidenced by the earnings reports. However, there is the question of sustainability and how big the capital spend will be to upgrade the infrastructure needed to accommodate this new technology.

Paul McCarthy of Kisco Capital, LLC

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Paul J McCarthy III

President, Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.