Boom or Bust? 3 things that could end our love affair with tech stocks

Join David Nelson, CFA for a very special episode of the Money Runner podcast. This is a deep dive into markets and tech stock valuations. Plus 3 things that could end the current love affair with technology shares. 

Expert Analysis on Tech Stock Valuations: Explore the fascinating world of tech stocks, including companies like Nvidia and Apple, and understand what their current valuations mean for investors.

Federal Reserve's Impact and Economic Indicators: Discover how Fed policies and economic indicators like inflation rates are shaping the investment environment and what that means for your portfolio.

Geopolitical Factors Influencing Markets: Unpack the influence of global events, from tensions in Ukraine to issues in the Middle East, and their potential impact on the stock market and investment decisions.
00:00 Head First
01:17 Market Wizard
01:36 Even the bulls are scratching their head
02:04 Every time I'm on TV
02:32 Is Apple Stock Expensive?
02:48 Is Nvidia cheap or expensive?
03:21 Dot.Com Bust
03:56 2021 Bubble
04:26 Irrational Exuberance
05:25 Internet bubble bursts
06:53 2024 vs 2021
07:55 3 things that could end the part
09:28 The Fed
10:20 Geopolitical Tensions
11:41 Investing is a journey not a sprint

Transcript

0:03

Ladies and gentlemen, tech enthusiasts and savvy investors. Welcome to today's very special episode of The Money Runner podcast. This is going to be a hard driving, deep dove headfirst into the heart pounding world of stock markets and technology valuations. I think you're going to stay glued to the screen to maybe, just maybe question everything you thought you knew about investing. Have you ever found yourself staring at the screen, flabbergasted by the astronomical rise in tech stocks and the valuations that go along with it? Does the word bubble dance on your tongue when you look at the current market? Well, hold that thought, because high prices alone are not enough to end the stock rally. There's a whole lot more to this high stakes narrative, and I'm here to uncover it. Welcome to The Money Runner. I'm David Nelson. Just when you think you've got it all figured out, a conversation with a market wizard like Dan Niles can turn your world upside down. It's not just about snagging a bargain at the market bottom or cashing out at the peak. Oh, no. It's about the elusive catalysts that drive those decisions. On the heels of Friday's better than 2% rally in technology shares, even the bulls are scratching their heads. It's not like we're coming off the lows. All stocks all stocks had a monster move in December. And let's be honest, not all the data is supportive. Ten year yields are back above 4%. And the rise of geopolitical tensions around the world have the potential to upend the strong economic narrative. Every time I'm on TV. I get asked the same question. Are stocks and in particular tech stocks overvalued. My answer is always the same. It's a nuanced answer. Is Dell trading at 12 times earnings. Is that expensive? Not growing terribly fast, but it is certainly smack in the middle of the AI revolution as the demand for processing power, AI server farms and the cloud continue to grow. Maybe. Maybe Apple fits that narrative. 29 times forward earnings for a company growing at best single digits. That's rich. If valuations were the only thing that mattered, Apple would likely be trading at 100. On the other side of this discussion, you have Nvidia, which many think is overvalued simply because of the price momentum. They are the brains of the AI platform. Their shares one of close to 240% last year and up almost 20% in just a few weeks this year. And yet it's for multiple or valuation went down. Is that overvalued? Well, we're right in the middle of earnings season. NVIDIA reports next month, so I guess we'll find out. Throughout history, we've seen this movie play out time and time again. And each time we learn that high valuations in a vacuum are not I repeat, not enough to throw the battleship into reverse. You need a catalyst. We could have had the same conversation in early 1999 as a lot of tech stocks like Cisco were increasingly looking like a bubble. If you made that bet, you would have been a full year early. The Nasdaq composite went on to a gain of over 87% that year, 2021. A similar story. The Fed and government continue to shower markets and investors with liquidity. The Fed not only kept rates close to zero on the short end, they continue quantitative easing, expanding their balance sheet month after month, even after ballooning it another 3 trillion. In 2020 alone, since just about every valuation model starts with the risk free rate. Valuations kept ballooning higher. The moral of this story was spelled out by the late, great economist John Maynard Keynes. The market can stay irrational longer than you can stay solvent. Former Fed Chair Alan Greenspan's irrational exuberance speech was made in 1996, a full four years before the market peak in 2000. In a vacuum, valuations rule, but the market doesn't trade in a vacuum, and neither should you. We are surrounded by data and a news cycle that continues to influence investor and market behavior. The direction of the fundamentals is even more important than the absolute values. Clearly there have been bubbles. I get it. And some poor investor always ends up being the last one in, but in each case it wasn't an absolute value metric that ended the party. It needed a catalyst. The bursting of the Internet bubble in 2000 had a few catalysts. Greenspan, then Fed chair, started hiking rates in June the previous year and continued all the way until May 2000, with short rates of six and a half percent. Money was tight and in part a contributing factor to the two stock declines. In March of 2000, Japan was in recession. But from my perspective as a Wall Street veteran working at Lehman during the rise and fall of the dot com era, Y2K was the single biggest driving catalyst that pricked the bubble. Companies spent millions panicking as the end of the millennium approached dire predictions of planes falling out of the sky in a digital world that would be forced to their knees if they didn't upgrade their systems to handle the changeover to 2000. Those of us working at Lehman often joked about the hundreds of computers coming on to the floor day after day after day. In December 1999. As a result, I'm sure a lot of companies over ordered, including the manufacturers themselves. In the end, it was a big rip off as countries that did little or nothing to upgrade their systems came through the millennium changeover just fine. Planes didn't fall out of the sky and the sun came up the next morning. We complain about valuations in 2024, but in 2021 I saw even more excesses. Many cloud stocks put in monster returns that year with little or nothing in the way of earnings growth was screaming. But we couldn't even have a conversation about multiples because there weren't any. Again, we needed a catalyst in the catalyst for bursting. The 2021 bubble was, of course, the Federal Reserve. Later that year, even Fed Chair Powell could see the inflation is transitory narrative was losing supporters and that they would be forced to pull liquidity from the system. And there's nothing nothing stocks hate more than when the Fed takes away the punchbowl. The March 2022 kick off to 11 rate hikes and more than a half trillion roll off of the Fed's balance sheet triggered a bear market, sending technology stocks on average down 28% that year. So here's three things that could end the party. Number one. Earnings season. Hedge fund pro Dan Niles said it right here on this podcast. This is when the rubber hits the road for tech stocks. Take a listen. You're kind of at the spot where the rubber hits the road, where these companies in a couple of weeks are going to have to put up numbers that justify these monster moves they've had, because last year, it really didn't matter whether you made earnings or not. It's early in the season and the AI heavyweights haven't given us their side of the story. For a day. The news on tech was good on Thursday evening, Supermicro computer SMCI reported blowout numbers, citing strong demand for its rack scale AI and total I.T. solutions. On Friday, the tech rally was led by SMCI, up a staggering 36% in a single session. Clearly, a lot of good news priced in. However, a missed earnings number alone isn't going to prick the bubble. Oh yeah. It'll send the shares lower. But in the end, an earnings report isn't just a look into the health of a company. It's also a report card on how good or bad a job the analysts did in getting the estimates right. But if a company like Nvidia or Microsoft says the demand isn't what we thought it was, or even worse that it's slowing, that would be enough of a catalyst for investors to rethink their commitment and love affair with tech. What else could blow up the current narrative? The Fed. For the last few weeks, the timing of the first cuts by the Fed has been pushed out. At the start of the year, a march cut was looking very promising. But here we are just a few weeks later, and that's been pushed out to June. Remember the explosive rally triggered by the Fed's November meeting and press conference that followed was built on the belief that we were at peak rates and that the Fed was going to start cutting rates sooner rather than later. Anything that delays or pushes out that narrative, that's a negative. If we got two back to back hot inflation reports, the Fed might be forced to tighten conditions further. And yes, the party would end. Finally, maybe the most difficult to plan for is rising geopolitical tensions that could easily spin out of control. The war in Ukraine looks like a stalemate, with some predicting that Putin might already be looking to countries like Finland or Poland, especially if he sees success in Ukraine. If a native country is attacked, Article five is triggered and the United States will be drawn into direct armed conflict with another nuclear power. Yeah. Trust me, stocks won't like that. Half a world away, the war in Gaza is spreading beyond its borders into the Red Sea as Iranian proxies continue to challenge international shipping throughout the region, according to Bloomberg. Ship transits through the Suez Canal dropped to the lowest level since the ever given blocked the waterway three years ago. Going around the Cape of Good Hope, adds close to 8000 nautical miles and nearly ten days to the journey. That's real money. Consumers worldwide will be forced to pay as those incremental costs are passed on driving prices and inflation higher. Trust me, stocks won't like that either. Let me close today's show with this investing is a journey, not a sprint. Markets will rise and fall, but our quest for knowledge and understanding, that's the true constant. Stay engaged, stay informed. And if you're watching this podcast, remember, this is a partnership. Reach out question and even challenge everything I say. You're learning? Yeah, well, so am I. I am you. When you feel you know it all, you're toast. The stock market and the market of life will exploit that flaw every time. The best trades and decisions are made with knowledge and courage. Until next time, keep running with a purpose. If today's podcast struck a chord and you want to continue the conversation, hit subscribe. And don't forget to visit my substack site. dcnelson123@substack.com. Thanks for joining. I'm David Nelson.