Artificial Intelligence (AI). Bubble or Beginning?
Summary
TLDRThe bull market continues with the S&P 500 up 7.2% year-to-date. There have only been minor pullbacks so far, with the market remaining above its 20 EMA, indicating a strong upward trend. AI and tech stocks like Nvidia, Microsoft, and Google are driving gains, justified by blowout earnings. We're likely only at the beginning of the AI revolution's impact, which could drive 10-15%+ annualized returns over the next 10-20 years. While a 5-10% pullback is still expected, the market has shown resilience, with investors piling back in on dips. Quality names like Google and Amazon still look reasonably valued for long-term investors.
Takeaways
- 😀 The S&P 500 and NASDAQ 100 continue to have a strong bull run in 2024, with only minor pullbacks so far
- 📈 High quality AI and tech stocks like Nvidia, Microsoft and Google are seeing huge earnings growth, justifying their share price gains
- 🔎 Nvidia's valuation shows it is not as overpriced as Cisco was during the dot-com bubble peak
- 💰 There is over $6 trillion in cash sitting on the sidelines, likely to flow back into the equity market
- 🤖 We are in a new AI-driven technological revolution (the 6th wave) which will transform lives and economies over the next 10-20 years
- 👆 This bull run is more sustainable than the dot-com bubble because companies have real earnings/cash flow growth now
- ⏳ Investing is a marathon, not a sprint - we are only at the 5-6 km mark of this long innovation runway
- 🔦 Some quality names like Google remain relatively cheap and can be bought on dips
- 😖 Don't chase stocks out of FOMO - wait patiently for 5-10% market corrections to buy
- 📉 Have cash ready to deploy when the inevitable pullbacks happen, as individual stocks can easily drop 10-20%
Q & A
What indexes and percentages show the bull market continues to be resilient so far in 2024?
-The S&P 500 is up 7.2% year-to-date. It has not had any major pullbacks or corrections, only three small pullbacks less than 2%.
How is the NASDAQ 100 performing compared to the S&P 500?
-The NASDAQ 100 is up 8% year-to-date, slightly more than the S&P 500. It has also only had minor pullbacks so far.
Which AI and tech related stocks are driving the market higher?
-Nvidia, Amazon, Meta, Broadcom, ASML, and AMD are some of the main AI and tech stocks driving the market higher.
Despite great gains over the past year, why does the author think many of these stocks are not overly expensive?
-Because their earnings growth is very high, often surpassing their share price increases, justifying higher valuations.
Why does the author think the stock market has become resilient to rising interest rates?
-Because rates don't affect the large tech companies as much since they have little debt, lots of cash, and don't need to raise capital.
Why does the author think there is still over $6 trillion in cash waiting to enter the stock market?
-Many investors missed the bull market and want to get invested. Also, money market rates may start dropping, sending investors to equities.
How does the author differentiate between hype and fundamental change when evaluating stocks?
-By looking at the earnings growth. If earnings are growing as fast or faster than the stock price, the gains are likely justified.
How does the author think the potential impact of AI compares to past innovations?
-He believes AI's impact will be 99/100, much bigger than the internet (50/100) or mobile phones (25/100).
Does the author think we are at the top of an AI bubble based on current valuations?
-No. He shows how valuations and performance today are much lower than during the dot-com bubble peak.
What approach does the author recommend for investing during this AI-driven revolution?
-Take a long-term, marathon mentality. Add stocks during pullbacks. And don't chase extended runs based on FOMO.
Outlines
😊 Bull market continues with minor pullbacks
The S&P 500 is up 7.2% year-to-date. There have been 3 minor pullbacks of less than 2%. The uptrend continues strongly as long as the market stays above the 20 EMA. The NASDAQ 100 is up 8% year-to-date with very minor pullbacks. AI stocks like Nvidia are delivering great earnings to justify price gains.
😃 Market immune to higher interest rates
Recently, 10-year yields going up did not significantly impact the market. High quality large cap AI stocks are immune to higher rates because: 1) Little debt, 2) Don't need to raise capital, 3) Huge cash reserves earning interest income. Market no longer expects Fed rate cuts until June.
😲 AI revolution bigger than internet
Market is resilient because many investors missed the bull market and rush to buy dips. Also, realization that we are in an AI revolution, the 6th great innovation wave, even bigger than the mobile and internet revolutions. Supported by rapidly growing earnings, this revolution will last 10-20 years.
🤔 Nowhere near dotcom bubble peak
We are not at the top of an AI bubble. At the 2000 dotcom peak, NASDAQ PE was 181x. Currently NASDAQ 100 PE is 45x, halfway to dotcom bubble peak. High growth justifies higher PE. AI earnings growing much faster than 2000.
🧐 Nvidia overvalued but long runway
Nvidia is overvalued on a standalone basis but has long growth runway. Unlike Cisco in 2000, Nvidia is up only 124% from breakout and PE is 65x (27x forward) versus 200x for Cisco's bubble peak. I own Nvidia but am waiting for a pullback to add more.
Mindmap
Keywords
💡Bull market
💡Pullback
💡Exponential Moving Average (EMA)
💡NASDAQ
💡AI stocks
💡Earnings
💡Overvalued
💡10-year Treasury yield
💡Cash on sidelines
💡AI revolution
Highlights
The S&P 500 is up 7.2% year-to-date and has not had any major pullback or correction
AI stocks like Nvidia are announcing blowout earnings, so the stock price increases are justified
Google is one of the cheapest quality AI stocks right now and is temporarily unloved
We are in a new AI and automation revolution wave that will transform lives and last 10-20 years
AI will have a bigger impact than fire, electricity and the entire internet
Look at earnings growth to know if a stock's price increase is hype or undergoing fundamental change
We are only halfway to the valuation levels of the dotcom bubble peak
Nvidia is nowhere near as expensive as Cisco was at its peak
Don't jump into stocks right now, be patient and wait for pullbacks to add positions
Amazon is still undervalued with an intrinsic value around $182
I'm waiting for a 5-10% correction which could happen anytime
Individual stocks may drop 10-20% quickly, use that to add positions
Don't chase stocks, the market marathon is just beginning
Do your homework and find quality companies selling at good valuations
Have a plan ready to take advantage when the inevitable correction happens
Transcripts
we are almost two months into the new
year and the bull market continues to be
very resilient so the S&P 500 it's up
7.2% year to- date and so far it has not
had any major pullback or correction
there have been three small pullbacks we
had one pullback over there another one
over there and recently another one over
there another one over there and they
were all less than a 2% pullback and the
market continues to be above the 20
exponential moving average so as long as
it's above this 20 EMA you can see that
this trend continues to be very very
strong so that's the S&P 500 and let's
take a look at the NASDAQ how's the
NASDAQ doing NASDAQ 100 and that is
up not too much more 8% year to date
slightly more than the S&P 500 and again
year to date it's only had um very minor
pullbacks along the way right so we have
one pullback over there one over there
and a slightly bigger pullback in the
last uh couple of weeks and how big was
this pullback let's see from the top all
the way to the bottom or that's just
about a less than a 4% pullback now
individual stocks especially AI related
stocks continue to do really well and
Justified because they're announcing
blowout earnings especially envidia just
announced insane earnings so the stock
price going up is well Justified and in
fact I just just updated my intrinsic
value of Nvidia to now if I'm not wrong
it's about
$6 90 thereabouts the new intrinsic
value so it is still overvalued but only
slightly overvalued not crazy overvalued
so the share price gains is justified by
very very strong earning so looking at
individual companies let's take a look
these are the stocks that make up the
NASDAQ 100 and you can see again the
high quality AI stocks are the ones that
is really delivering so Nvidia up 59%
year to date Amazon okay up 15% year to
date not too bad meta uh up 38% year to
date broadcom up 19% year to date asml
up 30% year year to date AMD up 26% year
to date um so these are the main guys
driving the AI place and Microsoft up
10% under performing uh is still Google
um and Google's a great company so I
think Google has uh is temporarily
unloved right now because of some recent
missteps and I think it's one of the
cheapest AI related plays that are high
quality right now now Adobe also
underperforming but only recently the
share price dropped a lot nothing wrong
with the company nothing wrong with the
financials it was just an emotional
reaction because open AI just released a
new text to video product that kind of
like freak people out oh my God are they
going to affect adobe's business I don't
think so in the long run maybe if Adobe
can't continue to innovate and catch up
but in a short term I don't think Adobe
is going to be very much affected so
Adobe uh underperforming but it's still
overpriced Adobe is slightly overvalued
because it went up so much above
valuation that even if this drop Adobe
is still not cheap but I think Google is
cheap and Amazon is still cheap although
based on the charts is a bit
overextended I'll wait for a pullback to
add more Amazon shares Nvidia slightly
overvalued as well I'll love to add when
I see a pullback Microsoft slightly
overvalued as well
meta um if I'm not wrong meta is
slightly overpriced as well so what's
interesting is that even though these
stocks have gone up so much these high
quality AI plays in fact over the last
one year let's look at the onee
performance uh is this one year yeah
this is one year right meta up 184%
Nvidia
2 79% Amazon up 83% Google up
57% Microsoft up 62% so despite these
great gains they are not really that
expensive if you factor in the earnings
that they are delivering now in my last
few videos I did mention that I expect a
bigger pullback or correction to happen
sometime soon in the late February to
March period of at least 5 to 10%
pullback or correction but it has not
happened yet reason there's no Catalyst
we need a catalyst for the market to
have a reason to sell off uh there was a
catalyst but the catalyst recently was
that the economy has been doing better
than expected job numbers better than
expected and of course inflation coming
in slightly stronger than I expected so
that caused a bit of a selloff in the
markets but it was nothing much it was
less than a 2% selloff and I'm pretty
surprised actually because um as you
guys recall in the
last year or so the market uh used to be
very affected by the 10year treasury
yield right right so every time there's
a fear of inflation every time there's
hotter than expected economic growth or
employment numbers the 10year yield
every time the 10 year yield goes up the
market will drop a lot the 10 year yield
goes up the market will drop a lot but
this time the 10 year yeld going up back
above its 200 day moving average the
market doesn't really go down Market
just went down a bit and went up again
so what's the reason here so I think one
of the reasons is because the market has
begun to realize that with the 10year
yield going up again with high interest
rates yes it will affect your rats it
will affect your bond prices it will
affect smaller companies that need lower
interest rates to raise Capital that
need lower interest rates because
they've got more debt on their balance
sheets but the markets come to realize
that if you're looking at the high
quality large cap companies especially
those related to AI Nvidia Microsoft and
Google and so and so forth they are
immune to higher interest rates so it
doesn't really matter that even if
interest rates go up again these
companies will continue to do well why
because number one they've got very
little debt so they don't have much
interest to pay on the debt number one
number two they don't they don't need to
raise capital and number three they have
got so much cash on the balance sheet
that their cash is earning them more
interest income that's adding to their
bottom line so the bottom line is that
right now the market seems to be IM
immune to these uh High interest rates
but of course if it gets back too high
then yeah we may get more of an effect
the other thing is that the FED uh now
you know everyone was expecting last
year that the FED would cut rates seven
times they will start cutting rates in
March and then the bear said that but
they don't cut rates in March then the
market is going to crash right they
didn't happen in fact right now the
market no longer expects the FED to cut
rates anymore until June take a look at
this fat watch tool you can see that for
the next fomc meeting coming up on the
20th of March the probability of a cut
or in ease is only 2.5% chance so
there's a 97% probability that the
market is expecting no cut stay right
and the only probability where we see a
cut is in the June meeting where the
market is factoring in a uh
62% chance of a cut 37% chance of them
holding rates so again the market
doesn't seem to give a anymore the
market is like okay don't cut I don't
care I'm still going up so it doesn't
really matter anymore which is pretty
interesting because the last two years
it matter it so much but the market
doesn't care about this anymore so why
why is the market so resilient why
doesn't the market care about the fat
not cutting rates of that long rates are
going up well there are two reasons
right number one reason is because a a
lot of people a lot of fund managers
especially professional investors and
even retail investors they miss this boo
market so this is one of the most hated
boo markets in recent history and many
bears there out there are very angry
right because they've got all these cash
sitting on the sidelines and the market
is going up without them so every time
the market goes down a bit the bears go
ah oh sorry the the previous Bears now
they start to put their money into the
market and the market goes up again so
they keep buying it up right because
they missed out they need to get back in
and currently we have got over 6
trillion in cash on the sidelines parked
in Mark money market funds and this cash
is looking to come back into the equity
Market especially once the FED Cuts
rates in June and they find that they
can't get as much interest rates on
their money market accounts they start
to rush back into the stock market and
that's when the market would really I
think really have a even bigger gain in
the the second half of this year
again that's just my guess I could be
wrong of course but that's just my guess
now the second reason why the market is
so resilient is because the market is
now beginning to realize something I
talked about last June which is we are
in a revolution we're in a new
technological six wve Revolution driven
by
Ai and if you think that AI is a height
I'm sorry you're going to be left behind
not just in terms as an investor you're
going to be left behind in terms of your
career and your business because this
thing is going to transform the entire
economy is going to transform businesses
it's going to transform all our lives
and for those of you who have started
using AI in your jobs you can see the
difference it
makes so if you recall last June I had
my midye event was it June or uh maybe
July August right I can't remember
anyway was it was my event last year
year the six wve event if you if you
guys recall and I showed you this chart
I said that you know uh every few
decades there's a wave of innovation
that transforms Our Lives transforms the
stock market and in the last 250 years
we had six of these uh Innovation waves
so we had the first wave the second wave
the third wave the fourth wave the fifth
wave and now we're in the sixth wave the
sixth wave is driven by AI now how
powerful is this AI um deep water Asset
Management one of these guys I think
Gene Master one of the uh uh top Traders
right he mentioned something which I
agree with he said
that uh if you take it out of 100 AI is
99 out of 100 the way it's going to
impact everything now compared to the
invention of electricity the invention
of electricity change our lives that's
100 over 100 but AI is close AI will be
99 out of 100 if you look at the
internet Revolution that uh spark the
fifth wave the fifth wave was the
internet Revolution that was only 50 out
of 100 the mobile Revolution when we
started to go on our mobile phones that
was only 25 out of 100 so if you think
that mobile phones change our life if
you think that the internet change our
life my God AI is going to change our
life more than double or triple what we
saw in the Internet and mobile so in
fact sundai picai who the CEO of
alphabet he said that AI will eventually
have a bigger impact than fire
electricity and the entire internet so
AI is not just another hype it is
changing our lives right now and will
continue to change our lives drastically
our businesses our economy our stock
markets now how do you know the
difference between a stock that's hyped
up and a stock that's really undergoing
a fun Al change very simple look at the
earnings if you see that the earnings
are growing as much or even more than a
share price then you know that the share
price increase is sustainable at least
for now as long as the growth continues
but if the stock price goes up and
there's no real earnings it's all like a
pie in the sky then that's Hy now I live
through the dotom bubble although I was
younger at the time I was in my 20s so I
remember the Doom bubble which people
like to compare today's market with was
totally different because in the dotom
bubble most of the dotom stocks were
unprofitable they weren't making any
money so the share price was not backed
up by earnings or cash
flow but in today's case the companies
that are driving up the market like
again your Nvidia and your Amazon and
your meta and your your Adobe and your
Salesforce your service now they are
actually making money and not only are
they making money the earnings are
growing at huge double digigit growth so
in my opinion it is sustainable all
right but of course there will come a
time when the growth will slow down and
of course markets will go through
corrections as well of course that will
happen it doesn't go up in one straight
line but um by and large we are in this
new six um wave of innovation that only
started mind you in 2020 so we're only
in the fourth year of this Ai and
automation Revolution that will last at
least the next 10 15 20 years so we
we're just at the beginning that's what
I'm saying what kind of returns can we
expect as an investor well no one can
see the future but if you look at the
past you get a bit of uh idea so in the
fifth wave that was driven by the
Internet by Mobile by software you can
see that the S&P 500 gained
1,950 over that 30-year wave so if you
annualize it that was a
10.26% annualized
return and I believe that this sixth
wave that we're in for the next 10 15 20
years is going to be even bigger than
the fifth wave so I think there's a very
strong possibility we we're going to get
an even higher return than
10.26% annual return on the S&P 500 on
average now again if you buy individual
companies that outperform the S&P or buy
the NASDAQ then you're looking at
doubling this now when I go on social
media I see some people saying that we
are already at the top of the AI bubble
really well let's take a look at some
numbers and let's judge well let me ask
you to judge for yourself so if you go
back to the Doom bubble which at the
time I was in my early 20s so uh still
remember it pretty well uh this was the
NASDAQ 100 during theom bubble which
peaked in March of
2000 at that Peak the PE Ratio which is
the price to earnings ratio was 8 81.7
times so where are we right now as of
now the PE ratio of the NASDAQ 100 is 45
times so we
are just about halfway to the valuation
level of the Doom bubble but bear in
mind that PE ratio does not take into
account the growth of the earnings
remember when the earnings growth is
high then the market or the stock
justifies a higher PE ratio and can tell
you that from experience or from memory
the earnings growth today of companies
like Nvidia and Microsoft which are you
know you know 40 50 200% earnings growth
it justifies the PE Ratio today and
compared to back then when many of the
companies were either not profitable and
even the profitable companies like Cisco
at the time their earnings were growing
at much less than today's uh AI related
company so there's no comparison so to
me we are nowhere near that kind of
bubble
top if we take a look at um Nvidia as a
as an example because a lot of people
have compared Nvidia to
Cisco cuz Cisco at a time was the most
hyped up company right Cisco went all
the way up and then it burst and it took
many many years to get back to the top
in fact I don't think it's even reached
back to the top even now okay and so if
you look at Cisco you can see that Cisco
uh it started its run right
there back in uh
1998 so it made a high over here you can
see it made a high and then it broke
above the high here in 1998 so this was
so-called the start of the internet
Revolution where people like oh my God
there's this thing called the internet
you will change your lives right so that
was then and Cisco went up
370% from the start of that breakout of
the previous high and it peaked at a PE
ratio of 200 times earnings so some
people are comparing and say oh Nvidia
is is very close well really well let's
take a look at Nvidia right here so
Nvidia today it made a high in uh 2021
so this was before cck GPT was released
before people even thought about AI all
right and then AI check GPT was released
somewhere there and then the whole uh
Revolution started okay and then Nvidia
broke a bir
the 2021 high right here so I'm kind of
like comparing it to Cisco so since then
Nvidia is up
124% from that breakout so if you
compare to Cisco Cisco went up
370% Nvidia is only up up 124% right and
while Cisco peaked at 200 times earnings
right now nvidia's PE ratio is 65 times
earnings now this is based on the last
12 months of earnings but you know that
nvidia's earnings are growing at 200%
right so if you take next 12 months
forward earnings forward PE then
nvidia's PE ratio is now only 27 times
earnings so actually Nvidia is nowhere
near where uh Cisco was in terms of how
expensive it was back then now before
you get all four more and say oh I'm
going to buy Nvidia right now before it
starts running higher wait cool down
relax I keep telling my students that
investing is a marathon it's not a
Sprint so like I said we're in this new
technological Revolution we're just at
the beginning so you know think of it as
a marathon 42 km we are only at the five
or 6 kilomet Mark so there's a lot more
to go there's a long Runway and I
wouldn't jumping right now to Nvidia now
I still own Nvidia shares now some of
you may say but didn't you sell your
Nvidia shares yeah I did I bought it
back at about 400 okay I sold it at
about 390 something and I bought it back
at 400 okay so I'm I'm I'm writing it up
as well um so right now I own Nvidia and
um I'm not buying more right now even
though uh I think that it can still run
way above $1,000 by the end of the year
but I'm not jumping it right now because
remember the wave pattern right wave up
wave down wave up wave down wave up I
never like to buy after wave up because
after wave up there will always be a
wave down so I'm patiently waiting for
the next wave down next retracement so
um I just did a quick revaluation of the
intrinsic value based on their latest
free cash flow and latest growth
projections so right now for NVIDIA my
valuation is about
$679 I think did I say $690 earlier on
my bad is $679 so based on the current
share price of
785 uh and I think today is going to go
up a bit more then it is overvalued it
is slightly overvalued so I'm not
selling obviously
because the valuation will keep growing
but neither am I buying right now so I'm
just going to wait and hold and I'll see
uh if it retraces down I'll add right so
that's NV video for you uh but there are
some again there are some high
quality um tech companies that I think
are still not too expensive like I
mentioned Google right so Google has
been very un loved uh and right now the
intrinsic value that I calculated is 172
so right now 144 it's still very very
cheap and it's because Google had some
recent PR disasters and they have not um
had much love from the market and so it
remains uh pretty undervalued right now
Google right and I think that is one of
those that are still uh interesting um P
Alo Networks
as well as uh foret they in the cyber
security game which is going to be a
huge player in the whole AI Tech
Revolution it had a big gap down
yesterday sorry two days ago right uh
and it dropped uh right at the intrinsic
value so for those of you who are my
students who are subscribed to my uip
service you got my alert yep I started
buying that day when it dropped down I
built a position started with a position
and I also sold some cash secured puts
um on Palo AO as well by the way I Al I
also sold puts on Nvidia just before the
earning was released so Nvidia went up
and my puts are worthless which is great
I got free money in one day so I'm
waiting for NVIDIA to drop back down
again buy more sell more puts and I'll
just keep doing that as we go
along um what else well if you look at
Amazon for example which I think is
going to be one of the biggest players
in this whole game Amazon is still under
Val I mentioned this before it's
$182 intrinsic value and right now it's
still cheap right but again would I add
right here no because you know I always
like to wait for a bit of a retracement
uh retracement to at least a 50 moving
average okay so do your homework look
around there are still some good quality
buys right
now uh but again don't ever have this
for more the fear of missing out and you
jump in no just relax because like I
said it's only the first two months of
the year and I do expect we will we
should have a pullback or correction
it's just that no one knows when's going
to happen it'll happen when we least
expect it but we should have a
correction of between 5 to 10% which
means individual stocks May draw 10 to
20% like you saw how fast Pao AO dropped
25% in one day it can happen all right
so when it happens that's when you want
to take advantage and grab shares okay
and and don't chase it you don't have to
chase Chase it the market will always be
there we we are in this Marathon we're
only in the very very early stages so
hope you enjoyed this video and stay
tuned for the next video And subscribe
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online this is Adam cou and may the
markets be with you
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