The path to Magnificent Exuberance

Signs of technical deteriorations had been appearing last week, but NVIDIA’s earnings report saved the day. The earnings report can best be described as a blowout. The results beat Street expectations on all metrics and the company guided upwards. There wasn’t anything not to dislike about the report. As a consequence, the Semiconductor Index, which is a bellwether for artificial intelligence (AI) related plays, rallied strongly after briefly testing the lower bound of its absolute and relative return rising channels.


Even though some excesses are appearing, I reiterate my view that the AI bubble has far more room to run before it reaches the phase of Magnificent Exuberance (see Why this AI bull is nothing like the NASDAQ in 2000).


Limited and early signs of froth

Much like the dot-com bubble of the late 1990s, signs of excesses are starting to appear.


This is how a bubble builds. Remember GE, which was one of the non-tech darlings of that era? Jack Welch, who was regarded as the superstar CEO of the day, demanded that his division managers become either number 1 or 2 in their business lines. If it failed to achieve those goals, the division was either shut down or sold.


Division managers who couldn’t make the numbers tried the old trick of financialization. GE would lend the customer money to buy its products and round-tripped the funds to inflate sales. The maneuver worked so well that GE Capital was born. GE Capital, in its efforts to achieve top two status in its industry, lent to anything that moved. It wasn’t just aircraft engines, but emerging market loans and subprime mortgages. GE Capital became bigger than the industrial divisions of the company and eventually blew up. GE CEO Jeff Immelt announced the divestment of GE Capital in 2014 and eventually its parts were sold off over the next two years.



It’s happening again. Instead of vendor financing, today’s tech giants are buying equity in companies and round-tripping the funds to boost sales. Amazon-Anthropic and NVIDIA-CoreWeave are just the two of the most visible examples of financialization. As today’s market is focused on the prospect of total addressable market and sales growth, tech executives, who are mostly paid with stock-based compensation, are scrambling to boost sales growth at any cost.

This will not end well, but not yet. It’s still early in the bubble.


As well, there have been some concerns raised about U.S. market index concentration. Those worries are mitigated by two factors. Concentration peaked in 1931–1932, instead of at the time of the 1929 Crash. As well, the current episode of increase in index concentration has been gentler and less sharp than the last two instances.



Valuations are also more reasonable than the dot-com bubble experience. The prices of technology and communication services stocks are still closely tracking their earnings.


Still, there are a number of warnings of excesses to be worried about. Walgreen is about to be replaced by Amazon in the Dow. SentimenTrader documented how being removed from the Dow has been on average a contrarian buy signal and new additions tended to lag the market.


The last time this happened was in 2020 when replaced ExxonMobil. Here is what has happened since. The latest change in the composition of the Dow may be a sign that Amazon and growth stocks are about to lag the market.



A virtuous cycle

There is no question that AI will transform the way we work over the next decade and it will boost productivity. Even without the benefits of AI innovation, a study by Tuan Nguyen and Joseph Brusuelas at RSM showed a surge in U.S. total factor productivity, which will encourage the Fed to overlook wage increases above inflation as they will be offset by productivity gains.


During the NVIDIA earnings call, CEO Jensen Huang said that the company was seeing a “tipping point” in demand for AI systems. Moreover, the latest results represent the first year of “a 10-year cycle of spreading this technology into every single industry.”

Putting it all together, AI-driven productivity gains on top of current gains could spark a virtuous cycle of non-inflationary growth in the U.S. economy. Such a scenario could lead to an AI-driven equity bubble of enormous proportions over the next few years.



No bubble yet

In conclusion, I believe the market cycle is in the early phases of an AI-driven boom. While some early signs of froth are starting to appear, sentiment is inconsistent with excesses seen at major market tops. As a reminder, here are some signs of excess of the dot-com era:

  • Investors piled into Mannesmann, a German industrial conglomerate known mainly as a manufacturer of steel tubes because it had a division that established Germany’s first cellular network. The company was eventually taken over by Vodafone for €190 billion, the largest takeover price paid at the time.
  • Hutchison Whampoa, Li Ka-shing’s main holding conglomerate, became a TMT (Tech/Media/Telecom) darling because of the telecom exposure of one division.
  • Company presentations in disparate industries like mining and forestry always included a section titled “our broadband strategy”.
  • The top was marked by a flood of low-quality IPOs. Does anyone remember all the B2B (business-to-business) and B2C (business-to-consumer) company offerings?

To be sure, some signs of froth are appearing, such as instances of financial engineering to boost sales. As well, the WSJ reported a flood of teenagers jumping into the stock market using custodial accounts (see These Teenagers Know More About Investing Than You Do).

Custodial accounts for teens at Schwab totaled nearly 200,000 in 2022, up from about 120,000 in 2019, according to the company. They jumped above 300,000 in 2023, thanks in part to Schwab’s integration of TD Ameritrade. Other brokerages, including Vanguard, Fidelity and Morgan Stanley’s E*Trade, also reported a surge in custodial accounts in recent years.



The latest BoA Global Fund Manager Survey showed that respondents had moved to a crowded long in technology stocks. While this may be a contrarian warning, it could be too early. History shows that such excessive overweight allocations can persists for years and for as long as the sector outperforms.


If I had to guess, the current AI-driven frenzy feels more like 1997–1998 than 1999 or 2000 of the dot-com era. The investment thesis is real and valid. Prices are just starting to surge. While the advance won’t be in a straight line, I would wait for the real signs of froth before turning cautious.

6 thoughts on “The path to Magnificent Exuberance

  1. Cam, any thoughts on your short term outlook with regards to technical corrections. My observation so far is that whenever there is the slightest look of a pullback, there is rotation into another sector. So if you had to guess on where capital could rotate, what area would that be? I see value areas of energy.

  2. This Path to Exuberance is the reason to stay in American investments even though international markets look cheaper.

    A well known strategist I was talking to about this said America is the last capitalist country. He said it gauges its success by the stock market. For good or bad to society, it will let A.I. business efficiencies be unleashed. That means fewer jobs in current companies. Europe and many other countries focus on general prosperity and lifestyle.

    1. America is an ongoing experiment. It attracts the brightest minds, the most ambitious, daredevils, and it has very large number of dim bulbs. It also boasts a large group of unsavory characters who are very adept at money games. If you like European style of life go for it. If you like adventures America is your place. If you are mediocre you are likely to suffer. It is a jungle. And that is the very reason it attracts people to come. The bottom line is: America continues to leap forward. It is better this way because you can grow the pie bigger, perhaps much bigger. If you have a bigger pie it is easier to spare a few pieces for the less unfortunate and the less capable. If your pie remains the same size or even shrinks you are just stuck there. It has been proven in Europe and Canada.

      America has a lot of problems and it is the default target of ridicule from all over the world. But that’s OK. There is no other place I would rather be. I can hop on a flight and visit any place in the world. I don’t need to live there.

  3. Increased productivity is great, do more per person hour is a good thing, only it is deflationary. If it involves a service then less worker hours are needed. If it is for a physical product, making the goods for less does not increase the number of consumers.
    So where does that leave us?
    The pushback from writers in Hollywood is telling.
    Almost 2 years ago when the market was swooning David Hunter kept saying “this is not how bull markets end” . At the time the S&P was sub 4000, so much bearish sentiment, and he was saying the S&P would go much higher, he was saying 5000, 6000, even 7000, but then it would collapse and lose 80 to 90%.
    Only, nobody knows how high or when, but there will come a time when buying way out of the money puts makes sense.
    There is also the problem of what exactly does market cap mean in terms of durable wealth. NVDA may have a market cap of 2 trillion but if 25% of shareholders wanted to sell, what would the cap be? Ditto with Bitcoin. Buffet says stream of income, which gets us to dividends over a long time frame. I guess that’s what people call value. It will have it’s day.
    People like Hussman talk about expected 12 year returns which of course are supposed to be low at present, which does not rule out an insane move in the next year or 2 or 3.
    AI will likely change things, the big question is if we will be better off.

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