A Market Stuck Sideways
The market has been contrarian for three to four months. The chop that started in the slow days of August has run into September. Big rallies get sold off because there are sellers waiting overhead (overhead supply). Dips get bought because people still believe in tech stocks. Rips sold plus dips bought equals a sideways market that moves hard but goes nowhere.
Three things drive the lack of direction. First, the war, with no clear time frame. Trump says it may last past the midterms. If it runs into next year, higher oil prices weigh on the real economy and on oil-sensitive stocks. Second, the Fed, since inflation is still a concern and the Fed stays committed to its 2% target, so interest-rate-sensitive names are getting hit. Third, the AI names keep grinding higher and hold the market up while oil and rates hold other stocks down.
AI Drives the Bus
AI is still driving the market. Without the AI stocks, the market would be about 20% lower than today. Technology moves it forward. The risk: if AI stops changing the world, or regulation slows it, stocks fall a lot. Last weekend the Anthropic CEO, Sam Altman, and Elon Musk talked about slowing AI down a little so security could catch up. Speed bumps that slow AI growth would bring stocks down. If AI keeps its current pace, the AI stocks keep the market elevated, and they are not super expensive.
AI is a big part of the economy but not the whole economy. Small caps have come off a lot. Over 50% of companies in the IWM (small-cap index) are not profitable, so when rates rise their borrowing costs climb and they get squeezed. AI stocks are far less sensitive to rates; higher rates don't help but don't hurt much. Companies powering through profits like Nvidia (NVDA), Micron (MU), and SanDisk (SNDK) won't be slowed by a quarter-point hike. The result is separation - some stocks up, some down. There are almost two stock markets: the real economy that is sputtering, and the AI economy still doing well, led by cash-generating names like Micron (MU) and SanDisk (SNDK).
What to Do as an Investor
For an investor: buy good companies at reasonable prices and hold through the noise. The chop eventually goes away, and good companies end up higher.
Take Broadcom (AVGO). The CEO went on Mad Money last week and said the company can make $30 a share by 2028. At about $350, the stock trades at 12 times 2028 earnings if it hits those estimates. The path there will be choppy because of oil and rates, but if Broadcom (AVGO) executes as the CEO says, the stock is likely higher in 2028.
Some think AI is a bubble. Michael Burry expects it all to come down in a wave of sellers. If you believe AI will change the world, some companies are on sale right now just because of the choppy environment. Oracle (ORCL) and Broadcom (AVGO) trade at multiples that are not crazy. Even Nvidia (NVDA) at 17 to 18 times forward is not crazy expensive. The war and its lack of resolution may be handing investors a chance to buy AI names at a discount.
The Capex Question
Since late April, the AI trade split. The big check-writing spenders - Alphabet (GOOGL), Amazon (AMZN), Meta (META) - broke from the infrastructure names. Around April 29th, another big capex surprise to the upside made it clear these companies could no longer fund the spending through free cash flow alone, and the correlation broke down.
What brings it back together? Showing that the money isn't being wasted. Real return would do it, but even short of that, proof that spending is producing something. People look at the capex burn - especially at Oracle (ORCL) - and ask where all that money is going. Show the proof.
This is why Meta (META) is being rewarded, with an incredible run over the last couple of weeks, because actual AI products are showing up. Google (GOOGL) is raising its capex and doing an offering to spend more. It is fine if profits don't come right away, but new products must come.
Apple (AAPL) hit new all-time highs after a successful product event. The foldable phone drew shrugs, but people use it as a laptop and to watch Netflix (NFLX); open it up for a bigger screen. Simple idea, real product. If companies show real products that prove the capex money isn't being incinerated, the market can forgive the spending. Not profits yet - new products.
Apple (AAPL) products being staples in daily life matters, but the business also needs discretionary spending from customers. The foldable phone could bring back the old lines around the corner for new releases.
