Market Bears Have Missed 2 Key Elements of the AI Story
Want outperformance? Now's not the time to ride the S&P 500.
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On Friday morning, the Nasdaq 100 (QQQ) is indicated lower by about 0.6% due primarily to a disappointing earnings report from Broadcom (AVGO) , which makes chips that fuel the AI sector. There are concerns about future sales, backlogs, and margins. This follows a negative reaction to Oracle (ORCL) on Tuesday, which weighed on mega-cap AI names and raised concerns about data-center spending.
Despite these difficulties in the AI sector, the Russell 2000 is set to move deeper into new high territory, and the overall mood is quite bullish. Investor's Business Daily is now suggesting exposure levels of 80-100%
The most notable aspect of this action is that the bears were somewhat correct about an AI bubble, but they missed two important elements of the story. First, there isn't just a sudden collapse in the entire group. There is increased competition, causing strong moves between the stocks viewed as winners and losers. Alphabet (GOOGL) and Apple (AAPL) have been winners while Microsoft (MSFT) and Nvidia (NVDA) have been under pressure.
The second issue that the bears have missed is that a lack of AI leadership is not killing the overall market. To the contrary, the weakness in the AI group is creating strong flows into other areas of the market.
For a long time, the average stock underperformed the indexes, which are dominated by mega-cap AI names. That has shifted, and the average stock is now outperforming the S&P 500. The easiest way to see this is to look at the Invesco S&P 500 Equal Weight ETF (RSP) , which broke out big after the Fed interest rate cut and jumped sharply higher on Thursday, while the S&P 500 barely budged
The rotational action out of AI and into the broader market is partially due to fundamental worries about AI, but it is also aided by the positive tone of the Fed. Chair Jerome Powell was surprisingly upbeat about the economy and sent a message that even minor additional weakness in the labor market could trigger another Fed cut within the next few months. Investors also liked the fact that the Fed was willing to expand its balance sheet by buying short-term Treasuries in order to relieve pressure in overnight lending markets and create additional liquidity.
The key issue for investors at this point is finding ways to increase market exposure. Stock-picking is the name of the game, and with so many smaller stocks already making sizable moves, it is becoming more difficult. This is a market that demands stronger trading skills. You can't just count on riding the indexes if you hope to produce exceptional gains.
At the time of publication, Rev Shark was long NVDA.
