Any classic Rock fans out there?
To continue with the high school theme from last month, I remember driving around Petaluma with my friends in the early 90's listening to mixtapes of 70's rock staples from Led Zeppelin, the Stones, Lynyrd Skynrd, Pink Floyd and the rest. Those tunes have stuck with me over the years and are still some of my favorite music today.
For the past month or so I've had one particular Pink Floyd song on repeat - at least thematically - if not played on regular rotation on my Spotify account.
As alluded to in the picture above (the cover photo of a very rare live album) Welcome to the Machine - the second track off of Pink Floyd's 1975 classic Wish You Were Here - has been on my mind A LOT recently!
Apparently, even I've grown tired of my continuous Terminator references this year and had to find a new (if less menacing) investment muse. Enter the genius of David Gilmour, Roger Waters and crew. While the song has absolutely nothing to do with autonomous robots or sentient computers, the imagery of the song title (and verse) have resonated to say the least.
If you've been following the financial news (and reading this newsletter) you probably know that Artificial Intelligence (AI) has been the hottest and fastest growing area of the market to date. As the second quarter of 2024 ended, the S&P 500 was up 14% for the year. Nvidia (the company making a majority of the AI chips) contributed nearly a third of that return (about 4.2%) on its own!
Welcome to the Machine indeed.
While the market is up, there is concern among investors and analysts that the current success is only possible because of a few large AI names like Nvidia and Microsoft. Furthermore, is it concerning that Nvidia is trading at 75 times earnings and nearly 40 times sales, while the S&P 500 is at 29 and 3 respectively?
Can AI stocks keep up this pace? When Marc Andreessen proclaimed that Software is Eating the World over a decade ago, some scoffed. He proved to be right of course. Building on that notion, it seems that if AI becomes the dominant software - the space has a tremendous amount of upside ahead.
As such, I tend to agree with Dan Ives (the always "fashionable" tech analyst at Wedbush Morgan) that we are in the early innings of an AI revolution and that the revolution will present strong investment opportunities. You can see some of Dan's thoughts on the subject in the video below:
Add in strong corporate profits, the continued ease of inflation (hopefully this persists) and the strong possibility of the Fed lowering interest rates and it seems like smooth sailing for the markets.
While I am optimistic, I like to think of myself as a rational optimist so I know that there will be tough conditions ahead. As such, I remain vigilant and will continue to pay close attention the ongoing AI story, as well as my favorites metrics - corporate earnings and inflation.
I'll report back next month, until I'm going to turn on my classic rock playlist and enjoy some great tunes!
I hope that you are all having a great summer so far! Wishing you all a great July and please let me know if you have any questions or would like to schedule time to chat.
Until next time!
Steve