Hartnett: The Fed Bubble Cycle
All bubbles start with Easy money and end with Rate hikes.
The Fed facilitates bubble growth with easy money. The Fed then hikes to deflate the bubble. The Fed breaks something. The Fed eases starting the whole process over.
Intro: Market Returns, The A.I. Baby Bubble
As the week ends we see the following for asset performance year-to-date best to worst:
crypto 53.5%,
stocks 8.7%,
gold 8.7%,
HY bonds 3.6%,
IG bonds 3.0%,
govt bonds 2.0%,
cash 1.6%,
US dollar -0.6%,
commodities -8.0%,
oil -9.3%
This week, the BOA analyst focuses his main thrust on equities in general and AI in particular. He brands the AI excitement a “Baby Bubble” and gives it a place on BOA’s well known bubble chart.
He then goes into the stocks that have done the best this year (full report at bottom) in particular dubbing them “The Magnificent Seven” after the movie of the same name. Those stocks are up 61% YTD comprised of Apple, Microsoft, Google, Amazon, Nvidia, Meta, Tesla. 1
From here he segues into the AI phenomenon and several historically related concepts. Yet he does not publicly make the connection between his Magnificent 7 and the AI craze. It is inferred. But a gap is there.
To fill in that gap as best we can here is our take on the link between Big Tech performance the past few months and A.I.
Who Does A.I. Benefit Most?
Those 7 stocks mentioned above have carried indices higher this year. Many have thought this narrowing breadth was a sign of an incoming stock implosion, especially in light of the broken banking system. But for the last two months that had not played out.
Instead at midweek last, Stevie Cohen2 announced, “We're going up" to all who would listen. Cohen was referring in part to the advent of AI as a rescuer of profitability for firms that will fire employees soon. That started the real run up.
The Magnificent Seven will be able to capitalize immediately on AI not just at the top line sales, but also at the bottom line by greatly reducing operating costs by firing people.
Here’s what GSTrader Tony P. (reattached at bottom) said on that Friday:
The fever around AI has been very detectable in the past month. - there’s a lot of rough work being done on the perceived winners. - the market is showing its hand ... it believes the biggest beneficiaries are the names at the very top of S&P index who notably carry the most market cap ... think MSFT, GOOG, NVDA