The AI Trade and Nvidia
The argument that we sit in an AI spending bubble can be put to rest. Nvidia (NVDA) is the tentpole holding up the broader AI trade. Its earnings beat last week was strong enough that calling it a "beat" understates it. On the return-on-investment question that has dogged AI spending, the answer shows in Microsoft (MSFT), Google (GOOGL), Amazon (AMZN), and NVDA itself. The market got the confirmation it wanted and now moves to the next questions.
The Biggest Risk: Oil and the Fed
Market uncertainty right now centers on the Fed after last week's Jackson Hole meeting: where interest rates go, US Treasury yields and yields worldwide, and pressure on the consumer. These tie into the coming election season. The single factor that links them most is oil. On-again, off-again conflict in Iran pushed oil back into focus. As long as that conflict stays active, markets must watch it, and it is driving current volatility and complicating the Fed's path. The jobs report on Friday could ease that path or make it harder.
A Neutral Fed Call Against Consensus
Jackson Hole gave a hawkish signal. The FedWatch tool prices about 66% odds of a hike, a level that moved higher. The CME shows just a 10% probability of no hike between now and year-end. I take the neutral side against this consensus. The inflation the market keeps pointing to is driven largely by a supply constraint in oil, which a resolution in Iran would solve directly. Hiking to fight a supply-driven oil problem would put the Fed at odds with the consumer and pile too much pressure on the labor market. That labor market is healthy but shows some cracks, and Friday will show more.
Yields and Big-Tech Valuations
The 10-year sits at 4.77% and the 30-year above 5%. Elevated long-term yields lift cap rates and interest rates, which cut the multiple investors pay on big tech and could bring ratings down. Long term it still comes back to earnings. So long as profits keep growing, even if not at the exponential pace of the last two quarters, I stay bullish on big tech. A re-rating lower does not make these companies fundamentally weaker.
I also doubt the 30-year stays as high as many fear, as long as oil prices come down; that opens a more stable path. US Treasuries look weak, but there is little strength anywhere else in the world. That makes the US the most eligible bachelor in the leper colony - being the best of the worst is still best at something, and I think that is what markets end up accepting.
The Consumer Is More Durable Than Feared
Fed President Hammock warned last week about a sharp uptick in spending, households running low on funds, and the need to act sooner. I disagree. The University of Michigan sentiment reading came in at 51.7 last week, which reads as a consumer under pressure, and that data is real. What matters more is behavior. Earnings from Lowe's (LOW), Home Depot (HD), and Walmart (WMT) show a consumer being more thoughtful about where money goes. People are not financing a $30,000 kitchen remodel because credit costs are high, but they are still buying and still hunting for value, as Walmart's results show. The consumer is more durable than the credit given.
Where the Value Is
Meta (META) carries the most value among big tech. A gray cloud from legal and government risk hangs over it, and pushing some of those settlements through would be a real positive change for the stock and give Facebook upside for shareholders.
Micron (MU) is another. Pent-up demand and a bottleneck in DRAM and high bandwidth memory (HBM), plus the capex spending expected next year, favor it. Only a few names can produce the enterprise chips needed, Micron is on that list, and it is expected to win a large share of that spending.
Uber (UBER) trades as if it faces existential risk from autonomous vehicles and robotaxis. Its distribution is a defensible moat, and robotaxis and self-driving cars will end up running through that network. Uber has also become a cash cow, growing adjusted EBITDA over 30% in the last 12 months.
SpaceX: A Long-Term Buy at a Lower Price
SpaceX (SPCX) trades near $140 a share today at about a $1.8 trillion valuation. I get more bullish at a lower valuation, around $1.3 trillion, which maps to roughly $100 a share. The technology is remarkable and the long-term future looks strong. Buyers today should hold two things in mind. First, be systematic - entry points matter a great deal in stock holdings. Second, understand what you are buying. Morgan Stanley and Goldman priced the IPO, and the current price sits close to that IPO price, giving the management team and Elon credit for two full years of execution. It is priced on the profits and revenues expected two years out, so you will not get a reasonable multiple against today's profits and today's revenue.
