Posts tagged ‘tech stocks’
Rational or Irrational Exuberance?
The government may be shut down, but the stock market hasn’t noticed. In fact, stocks just capped another record-breaking month. The S&P 500 gained +2.3%, the NASDAQ climbed +4.7%, and the Dow rose +2.5%.
Millions of Americans are feeling the downside of the shutdown—from disrupted travel to stalled services and furloughed workers. Historically, such uncertainty rattles Wall Street. This time? Investors seem more captivated by the transformative promise of artificial intelligence (AI).
So, the key question today: Is this AI-driven exuberance rational—or irrational?
Exuberance Then vs. Exuberance Now
Having invested for more than 35 years, I’ve seen periods of euphoria and fear. I vividly remember December 1996 when Fed Chair Alan Greenspan famously questioned whether markets were becoming “irrationally exuberant.” Back then, the NASDAQ sat near 1,300. Over the next three years it soared past 5,100 (almost quadrupling), only to crash nearly 80% by 2002.
But here’s the twist: it’s true, we did experience a “tech bubble burst”, but where is the NASDAQ index value today? Amazingly, the index stands at 23,000 (see chart below) – an 18x increase above the 1996 level when Greenspan gave his irrational exuberance speech! So, in hindsight, the sound we heard during 2000 was not the tech bubble bursting but rather an internet Big Bang! The internet wasn’t a speculative fad—it was the foundation of a global transformation.
So, what about AI?
Source: Macrotrends LLC
Internet Cycle vs. AI Supercycle
The internet era lifted the number of online users from zero to five billion—over 60% of the planet (see chart below). The AI wave kicked off publicly in November 2022 with ChatGPT’s release. In under three years, the NASDAQ has more than doubled. That pace isn’t sustainable forever, of course. Bubbles form, emotions swing, and markets correct. But dismissing AI as a fad ignores its unmistakable—and accelerating—impact.
Source: BOND – Mary Meeker
With the rapid appreciation in the stock market, it’s important for investors to identify and understand the warning signs of potential bubble bursting or market crash. In fact, I continue to do my part by studying past crashes. My shipment of Andrew Ross Sorkin’s book, 1929: Inside the Greatest Crash in Wall Street History just arrived and all these lessons remind us that not all booms are bubbles, and not all crashes end innovation.
Not All Bubbles are Created Equal
Major market drawdowns are part of a long-term investor’s journey:
- 1929: Great Crash
- 1973-74: Nifty-Fifty
- 1987: Black Monday
- 2000: Dot-com bust
- 2008: Financial crisis
- 2020: COVID crash
Many pundits today are now asking is this AI surge the next bubble? Valuations, as measured by P/E ratios (Price/Earnings), suggest a very different setup than in 2000.
Back then, many tech leaders traded at 100x+ earnings. Today’s Magnificent Seven tech leaders are elevated, but nowhere near dot-com extremes:
- NVIDIA Corporation (NVDA): 57x
- Apple Inc. (AAPL): 36x
- Microsoft Corp. (MSFT): 36x
- Alphabet Inc. (GOOG): 32x
- Amazon.com, Inc. (AMZN): 31x
- Meta Platforms, Inc. (META): 23x
*Source: MarketSurge – only Tesla, Inc. (TSLA) has a P/E higher than 100x.
For the S&P 500 overall, the index has a forward P/E of 22.8x (Yardeni Research), significantly lower than 2000 levels and nowhere near bubble territory.
Source: Wall Street Journal – March 14, 2000
Life After the Internet and Life After AI Introduction
Think back 25 years:
- Renting movies at Blockbuster before Netflix went digital
- Driving to the bank for deposits
- Buying stamps to mail checks before Venmo or Zelle
Today, those activities feel prehistoric. AI is set to reshape daily life on an even faster timeline — from medicine and logistics to entertainment and marketing.
I’m discovering “AI epiphanies” weekly.
- With a few prompts, I created a beautiful Mother’s Day poem and became a poet hero despite never writing poetry before.
- When I recently needed to write an obituary for my mother, AI helped structure and refine it in minutes instead of taking me hours.
- Just last month I needed to hunt down lobster bisque for a shrimp pasta recipe I wanted to make. It turned into a time-wasting scavenger hunt. Thankfully, AI found it in stock, even when multiple apps insisted it wasn’t available. Needless to say, the recipe was incredibly delicious, and my stomach thanked ChatGPT.
And when it comes to investing? Evaluating biotech companies used to take weeks. Now, detailed research can be synthesized in days without sacrificing rigor. AI isn’t replacing insight — it’s amplifying output.
Not All AI Stories Are “Unicorns and Rainbows”
AI boosts productivity. Higher productivity means some companies need fewer people. Amazon recently announced 14,000 layoffs despite reporting amazing financial results. Microsoft and Meta have also announced thousands of employee layoffs even as profits rise.
This isn’t doom and gloom — it’s innovation cycles in action. Technology displaces tasks before ultimately creating new industries and roles.
So… Rational or Irrational?
Although there has been much debate regarding whether we are in an AI bubble, from my perspective, we are in the very early innings of a long AI revolutionary game. There are definitely pockets of frothiness that expose investors to undue risk, but if you can follow a disciplined, diversified, valuation-sensitive investment strategy, like we implement at Sidoxia Capital Management, I feel that the current exuberance is more rational than irrational.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (Nov. 3, 2025). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in NVDA, AAPL, MSFT, GOOGL, AMZN, META, TSLA, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Par for the Course
Stocks have been in a multi-year bull market, but just as investors cannot earn positive returns every month, golfers also cannot achieve a hole-in-one or birdie on every hole, either. A challenging performance is exactly what happened last month when stocks recorded a bogey on the scorecard.
More specifically, this is how far out-of-bounds the major indexes were last month:
- S&P 500: -1.4%
- Dow Jones Industrial Average -1.6%
- NASDAQ: -4.0%
Technology stocks and the Magnificent 7 stocks felt the largest brunt of the force last month as tariffs and the impact of Chinese AI (Artificial Intelligence) competition gave investors heartburn as they digested the information (see New Year, New AI ERA & New Tariff Sheriff).
Tariffs – More Molehill Than Mountain
As mentioned, a large part of last month’s volatility can be explained by the policy uncertainty surrounding the impending tariffs on China, Canada, and Mexico. Despite the absence of new tariffs being implemented, in an attempt to lock in cheaper imported goods, U.S. corporations and consumers have been stockpiling foreign goods before prices move higher due to tariffs. The 25% proposed tariffs on Canadian and Mexican goods are set to be applied as soon as March 4th. A flat 25% tariff on imported steel and aluminum products is expected to begin on March 12th – these particular tariffs are expected to have a disproportionately negative impact on the automotive industry.
Regarding other proposed reciprocal trade agreements, the White House’s analysis on tariffs for all other countries (beyond China, Canada, and Mexico) is expected to arrive on the president’s desk on April 2nd.
All these proposed changes are having an immediate economic impact whether intended or not. Not only are consumers buying more overseas products now, as they brace for higher prices, but businesses are also shifting supply chains to countries outside of China, Canada, and Mexico, in hopes of finding temporary tariff loopholes.
The bottom-line is our country’s imports have been spiking up recently, especially in the first quarter. Imports by definition subtract from America’s economic activity, so if businesses and consumers are rationally stockpiling foreign goods before prices go up from tariffs, investors should not be surprised that GDP (Gross Domestic Product) growth is set to go negative in the first quarter (-1.5%), according to the Federal Reserve Bank of Atlanta.
This short-term spike in foreign product purchases should be temporary until the tariffs are officially put in place. Subsequently, demand for relatively cheaper U.S. goods should rise because foreign goods will be pricier. In other words, buyers may begin purchasing more American-made t-shirts on Amazon because those shirts could be cheaper than the Chinese-made t-shirts after the additional tariffs commence on China.
How large are these overall tariffs? When it comes to Mexico and Canada, the size of these countries’ imports is estimated at $918 billion (see the 2023 import breakdown below for the two countries). On the surface, this sounds like a very large number, and it is. However, if you consider the size of the U.S. GDP ($29.4 trillion), these tariffs will mathematically have less than a 1% impact on the direction of our country’s economic activity.
However, if demand for American products goes up after the tariffs begin, as mentioned above, then it is perfectly logical to expect the drag from imports can be diminished or possibly completely reversed, if consumers decide to buy more American goods.
Source: Visual Capitalist
Also worth noting, as I documented last month in my Investing Caffeine blog, imports only account for 13.9% of our country’s economic activity (see New Tariff Sheriff). So, while tariffs make for great scary headlines, the reality of the numbers paints a different picture. Overall, the uncertainty surrounding the discussion of tariffs is having a much larger economic impact than the actual tariffs themselves. In other words, what we are discussing is more molehill than mountain. We saw this same movie before during the administration’s first-term when tariffs did not crater the economy into recession or create disproportionately high inflation.
War at the White House
A geopolitical soap opera played out on global television last Friday during a meeting between Ukraine’s President Volodymyr Zelensky and President Trump in the Oval Office. The meeting was designed to be a celebratory signing of a minerals deal in which the U.S. would gain access to strategically important Ukrainian rare earth metals in exchange for continued U.S. aid and military support. A signed deal would increase the probability of a peace deal between Russia and Ukraine dramatically. What actually happened was a war of words at the White House, which resulted in Zelensky getting kicked out of the White House with no signed deal.
Both sides have economic and strategic incentives to reengage in peace and mineral deal negotiations, but if the U.S.-Ukraine relationship totally crumbles, Europe and the other NATO (North Atlantic Treaty Organization) countries will need to pick up the slack in their military and economic aid to Ukraine. Regardless, increased European support is required to stave off a broader incursion by Russia and Vladimir Putin into a wider portion of Europe.
Tariffs, the Russia-Ukraine war, and AI issues may have heightened investor anxiety last month, but long-term investors understand that annual -5% and -10% corrections in the equity markets are considered par for the course. In fact, over the last 12 months, the S&P 500 index has declined -5% five times, and -10% one time, yet the stock market is still up +16% on a trailing 12-month basis (see chart below).
Source: Trading Economics
Financial markets end up in the rough plenty of the time, which often results in performance scorecard bogeys. However, long-term investors and Sidoxia Capital Management clients have won more often than not because the benefits of American capitalism have created many more birdies and pars over time.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (March 3, 2025). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in META, NVDA, certain exchange traded funds (ETFs), but at the time of publishing had no direct position in BABA or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on the IC Contact page.
Recession Storm Fears Reign Supreme as Stocks Gain Steam
Commentators continue to shout the doom-and-gloom forecasts of a hard landing recession, but after an economic hurricane in 2022 there are some signs the financial clouds have begun to lift this year. The stock market has reflected this positive fundamental shift during January, as the S&P 500 catapulted +6.2%, NASDAQ +10.8%, and the Dow Jones Industrial Average +2.8%.
Last year, a major influencing cause to the -19% downdraft in the stock market (S&P 500) was due to the highest inflation readings experienced in four decades, compounded by a Federal Reserve hell-bent on slamming on the interest rate brakes. A big contributing factor to the surge in inflation was the spike in consumer spending fueled by trillions in government stimulus, coupled with widespread shortages in goods triggered by supply chain disruptions.
Fortunately, the headwinds of inflation now appear to be abating. Recently released inflation figures showed core inflation dropping from a peak of 9.1% last year to 3.5% in the fourth quarter (see chart below). Although the Fed will likely raise its interest rate target by 0.25% up to 4.75% this week, the downward reversal in inflation has raised the probabilities of the Federal Reserve “pausing” or “pivoting” on the direction of previous rate hikes. The odds of a halt or cut in rates will likely only increase if the descending trajectory of inflation persists and other upcoming economic data weaken further.
No Signs of Recession…Yet. Investors Waiting for Another Flood
While the calls for a hard economic landing remain, healthy GDP growth (+2.9% in Q4), generationally low unemployment (3.5%), and relatively stable earnings (see chart below) all point to a stable economy with the ability to navigate a soft landing. China’s new reopening of the economy and Europe’s seeming ability of dodging a recession provide additional evidence for a soft landing scenario.
As you can see further from the 25-year earnings chart above, the drop in S&P 500 earnings in recent months has been fairly modest compared to previous downturns, and the forecast for 2023 earnings is currently estimating a modest gain on a year-over-year basis. Over the last 25 years, we have arguably experienced three 100-year floods (2000 Tech Bubble, 2008 Financial Crisis, and 2020 COVID pandemic), so investors have been bracing for another enormous financial hurricane.
Although the bursting of the 2000 Tech Bubble had an outsized impact on the technology sector, the effect on the overall economy was more muted, as you can observe from the shallow decline in the earnings. As the earnings show, during the Financial Crisis (2008) and COVID (2020), the crash in earnings was much more severe. Thus far in 2023, there has been no earnings plummet or sign of recession, and if financial conditions continue to soften, there is no reason we couldn’t undergo a more vanilla, garden-variety recession like we did in 1990 and 2000.
Stairs & Elevators
While the future always remains unclear, nobody knows for certain whether a recession will occur this year or if the 2022 bear market will endure into 2023. However, as you can notice below, history over the last 70 years shows the duration of bull markets (average of about 6 years) are much longer than bear markets (approximately 1 year). I like to compare bull markets to walking up stairs in a tall building, and bear markets to going down an elevator. The main difference is that the stock market elevator generally never goes to the bottom floor and the stairs keep growing to record heights over the long-run. Since World War II, Americans have experienced 13 economic recessions (see also Recession or Mental Depression?). Not only are investors batting 1,000% in successfully surviving these recessions, they have thrived. From 1956 until the present, the S&P 500 has vaulted approximately 80-fold.
Presently, economic skies might not all be clear, blue, and sunny, but the fact that inflation is dropping, our economy is still growing, labor markets remain healthy, China has reopened for business, and Europe hasn’t cratered all leave room for optimism. It may not be time to bust out the sunscreen quite yet, but the dark economic clouds of 2022 appear to be lifting slowly.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (Feb. 1, 2023). Subscribe Here to view all February articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Return to Rationality?
As the worst pandemic in more than a generation is winding down in the U.S., people are readjusting their personal lives and investing worlds as they transition from ridiculousness to rationality. After many months of non-stop lockdowns, social distancing, hand-sanitizers, mask-wearing, and vaccines, Americans feel like caged tigers ready to roam back into the wild. An incredible amount of pent-up demand is just now being unleashed not only by consumers, but also by businesses and the economy overall. This reality was also felt in the stock market as the Dow Jones Industrial Average powered ahead another 654 points last month (+1.9%) to a new record level (34,529) and the S&P 500 also closed at a new monthly high (+0.6% to 4,204). For the year, the bull market remains intact with the Dow gaining almost 4,000 points (+12.8%), while the S&P 500 has also registered a respectable +11.9% return.
The story was different last year. The economy and stock market temporarily fell off a cliff and came to a grinding halt in the first quarter of 2020. However, with broad distribution of the vaccines and antibodies gained by the previously infected, herd immunity has effectively been reached. As a result, the U.S. COVID-19 pandemic has essentially come to an end for now and stock prices have continued their upward surge since last March.
Insanity to Sanity?
With the help of the Federal Reserve keeping interest rates at near-0% levels, coupled with trillions of dollars in stimulus and proposed infrastructure spending, corporate profits have been racing ahead. All this free money has pushed speculation into areas such as cryptocurrencies (i.e., Bitcoin, Dogecoin, Ethereum), SPACs (Special Purpose Acquisition Companies), Reddit meme stocks (GameStop Corp, AMC Entertainment), and highly valued, money-losing companies (e.g., Spotify, Uber, Snowflake, Palantir Technologies, Lyft, Peloton, and others). The good news, at least in the short-term, is that some of these areas of insanity have gone from stratospheric levels to just nosebleed heights. Take for example, Cathie Wood’s ARK Innovation Fund (ARKK) that invests in pricey stocks averaging a 91x price-earnings ratio, which exceeds 4x’s the valuation of the average S&P 500 stock. The ARK exchange traded fund that touts investments in buzzword technologies like artificial intelligence, machine learning, and cryptocurrencies rocketed +149% last year in the middle of a pandemic, but is down -10.0% this year. The Grayscale Bitcoin Trust fund (GBTC) that skyrocketed +291% in 2020 has fallen -5.6% in 2021 and -48.1% from its peak. What’s more, after climbing by more than +50% in less than four months, the Defiance NextGen SPAC fund (SPAK) has declined by -28.9% from its apex just a few months ago in February. You can see the dramatic 2021 underperformance in these areas in the chart below.
Inflation Rearing its Ugly Head?
The economic resurgence, weaker value of the U.S. dollar, and rising stock prices have pushed up inflation in commodities such as corn, gasoline, lumber, automobiles, housing, and a whole host of other goods (see chart below). Whether this phenomenon is “transitory” in nature, as Federal Reserve Chairman Jerome Powell likes to describe this trend, or if this is the beginning of a longer phase of continued rising prices, the answer will be determined in the coming months. It’s clear the Federal Reserve has its hands full as it attempts to keep a lid on inflation and interest rates. The Fed’s success, or lack thereof, will have significant ramifications for all financial markets, and also have meaningful consequences for retirees looking to survive on fixed income budgets.
As we have worked our way through this pandemic, all Americans and investors look to change their routines from an environment of irrationality to rationality, and insanity to sanity. Although the bull market remains alive and well in the stock market, inflation, interest rates, and speculative areas like cryptocurrencies, SPACs, meme-stocks, and nosebleed-priced stocks remain areas of caution. Stick to a disciplined and diversified investment approach that incorporates valuation into the process or contact an experienced advisor like Sidoxia Capital Management to assist you through these volatile times.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (June 1, 2021). Subscribe on the right side of the page for the complete text.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in GME, AMC, SPOT, UBER, SNOW, PLTR, LYFT, PTON, GBTC, SPAK, ARKK or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
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