Earnings season has been a monster for tech companies as the AI story has propelled these stocks dramatically higher. But one has to ask, has the AI trade become too easy?
Now let me start here: I have no clue if the AI stock story is in the 3rd inning or the 9th inning … no one does, as it’s entirely possible that stocks like Palantir (PLTR), which is up 143% year to date, could be up another thousand percent in the years to come. As I always say, my crystal ball for making long-term predictions is currently in the shop.
And the bull case for AI is pretty easy to make following recent earnings announcements where companies like META, MSFT, ORCL and more are pledging to spend hundreds of billions of dollars building out their AI platforms.
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Furthermore, when tech titans like Larry Ellison, the chairman of Oracle say things like, “I think it’s very, very clear: AI is a much bigger deal than the Industrial Revolution, electricity, and everything that’s come before,” and later said on the company’s earnings call, “Demand right now seems almost insatiable. I mean, I don’t know how to describe it. I’ve never seen anything remotely like this,” it’s hard to not be bullish on AI stocks.
Throw on top of these bullish headlines, stocks like GLW, GEV, ANET, MSFT, NBIS, AVGO, TSM and many more making new highs virtually every day, it’s hard to be bearish on the sector.
However …
While being long AI stocks has been a monster win for subscribers to nearly all Cabot services, I do wonder if the AI trade is becoming a bit too easy. Here is what I mean:
First off, countless stocks have been left behind in the last several years. For example …
As @KevRGordon pointed out on X: “Over the past 4 years: S&P 500 +44.8% Russell 2000 +2.3%.”
Also, Healthcare (XLV) hit a new fresh all-time relative low today compared to the S&P 500, and as noted below via Bloomberg, it’s been a bloodbath when compared to tech in recent years, as seen in the right half of the following graphic:
And while not rooted in data, my “spider sense” from years of trading tells me it’s become too easy to buy random AI, quantum computing, and unprofitable companies’ stocks and watch them roar higher. And in fact, call buying in the most shorted stocks has surged higher as of late (never a good sign in my opinion), as noted by Deutsche Bank below:
Stepping back, nothing would make me happier than the AI trade to fuel the market higher for years to come. That being said, my radar is up that perhaps this trade may need to cool off a bit in the short term … maybe.
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