This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with:
Getting old sucks, and I don’t like it one bit.
My hair is thinning. I don’t wake up at 1:45 a.m. each day with the same fiery energy to obsess over markets and stocks. I am down to eating red meat three times a month “just because” it’s what people have told me is the right thing to do at this point in life.
From what I can tell, one of the only positives of getting old is experience.
And my experience in analyzing and reporting on markets and leaders for more than a decade tells me that investors have become fully engulfed in an AI-fueled tech bubble.
To be fair, this feels like a much different bubble than the cannabis and crypto stock bubbles of years gone by, as tech giants like Nvidia (NVDA) and Microsoft (MSFT) have real money-minting business models. Their leaders also aren’t inexperienced dopes (see the cryptosphere’s bad actors of the last two years).
But make no mistake: We are in a bubble, and it could end badly at some point.
Here are some of the elements I see to support this view.
Everything rallies, but should it?
Nvidia shares ripped 15% higher last Thursday after earnings. The report sent the broader market ripping higher too.
Nvidia rivals AMD (AMD) and Arm (ARM) saw strong bids. New hot Yahoo Finance ticker Super Micro Computer (SMCI) exploded by 36%. Even Intel (INTC) caught some Nvidia tailwinds. And shares of Meta (META), which has been out in front in buying Nvidia chips, shot higher as well.
Doesn’t this all look insane and feel akin to blind buying by FOMO traders?
In a normal functioning market, Nvidia doing amazingly is bad news for competitors such as AMD and Intel. Nvidia is selling more of its chips, meaning fewer sales opportunities for rivals. Shouldn’t their stocks drop?
Just because Meta owns and uses some new Nvidia chips, how is that going to positively impact its earnings and cash flow over the next four quarters? Will it at all?
The point is that investors are acting irrationally as Nvidia serves up eye-popping financial figures and the hype machine descends on social media. It makes sense until it doesn’t, and that is classic bubble action.
Justifying inflated valuations
Still not convinced this is an AI-fueled tech bubble?
Then cast your eyes on the typical Wall Street action of justifying ever-higher valuation multiples on stocks.
“At 29x our calendar year 2024 estimated [earnings per share], Nvidia trades at a lower multiple vs. peers Intel and AMD,” one analyst wrote in a note following the Nvidia earnings stampede. “We view the valuation as compelling. Nvidia remains a top pick.”
I am not saying Nvidia shouldn’t be valued at a premium to the market — not saying that at all, so don’t shred me via email.
What I am asking you to do is to deconstruct the above commentary, which is creeping more and more into tech coverage.
The analyst, in this case, has rationalized that 1) high price multiples for slower growers Intel and AMD are OK because AI is so hot, or so it seems, and 2) Nvidia’s stock deserves to trade at about a 33% premium to an already rich P/E multiple on the S&P 500.
Nvidia’s valuation isn’t mind-blowingly compelling considering earnings estimates have been jacked up to the ceiling! This is a priced-for-absolute-perfection tech stock.
But hey, inside a tech bubble, anything goes, right?
Thinking you can’t be stopped
Nothing says “investing bubble” like unbridled confidence. It’s that feeling that whatever stock you buy — at whatever price and at whatever time — will only go up forever. This makes you feel like an investing genius and inclined to take on more risk.
Here’s a dose of insight that shows a ton of overconfidence sweeping through markets.
Traders’ confidence in their own decision making, consistent with bullishness, just hit the highest level since Charles Schwab began its Trader Sentiment survey, the financial services firm said this week. From a sector perspective, traders are most bullish on information technology (shocker). They are very upbeat on AI stocks in particular (shocker).
News flash: You aren’t an investing genius. The best thing you can do right now to grow your wealth is realize it’s time to lay the groundwork to begin protecting your wealth that has been created by the tech bubble.
Lean on your investing experience and all its wrinkles.
Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on Twitter/X @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email brian.sozzi@yahoofinance.com.
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