Our Visit with Stephanie Link: Her Story, Approach, Outlook & More – Part I

Five Things You Should Know

1. Equity Markets – moved higher this week with U.S. stocks (S&P 500) up 0.83% and international stocks (EAFE) rising 1.81%
2. Fixed Income Markets – rose as well with investment-grade bonds (AGG) up 0.82% and high-yield bonds (JNK) up 0.65% 
3. Powell Speaks – In comments to Congress this week Fed Chair Powell reiterated the Central Bank’s stance that officials remain wary of potential risks to the labor market as a result of high borrowing costs and was careful not to set a timeline on when rate cuts may be on deck. As of now, expectations for cuts have slightly improved, with investors now expecting the first cut to start in September.
4. Chipmakers Booming – The exponential growth in demand for AI has sparked massive chip sales, with $3.5 billion of chip and chip-related equipment exports from Taiwan last month alone. This marks a 442% surge year-over-year, with the U.S. becoming the largest purchaser of chips in the world.
5. Key Insight – [VIDEO] Whether you attended the event, but hoped to catch more from Stephanie, or couldn’t make it and hoped to hear her story and current thoughts/outlook you won’t want to miss our four-part series/interview with Hightower Chief Investment Strategist and CNBC Contributor Stephanie Link. This week is Part I where she shares how she got her start, how she built her career and how she helps practices like TEN serve their clients. [ARTICLE] We’ve begun to call it “compounding stupid” around TEN. The idea of attempting to trade one’s account based on predicting the market’s reaction to yet another historically flawed group of economic predictors in the Fed. Process and Partners, not prediction is the path forward, and we discuss the current environment and weeks’ notable market movements in light of the latest Fed news.

Insights for Investors

This week begins our four-part video series with Stephanie Link, which we shot during her visit for our Summer Quarterly at the end of June. Without exception, our guests expressed both what a wonderfully entertaining speaker she was, but also a deep appreciation for the work she puts into her craft as an equity manager/strategist.

We certainly are grateful not only for her visit, but the ability to call her and her team our colleagues.

Research, discipline, partners and process are some of the key ingredients to success. And while it’s obvious when pointed out, the day-to-day noise of life, let alone hyperbolic media coverage of markets makes not only keeping them top of mind, but practicing them difficult for any of us.

Their importance, while always there, is even more important/evident on weeks like the one we just had where markets rose and fall on largely the same news. Wednesday saw markets soar around 1%+ based on the “rationale” that inflation was cooling and the Fed should begin to cut soon, only to fall by the same or more on Thursday as it began to dawn on people that the sudden “disinflation” could portend a recession that rate cuts would be unlikely to prevent.

The real takeaway should be trying to avoid “compounding stupid” instead of “compounding interest.”

What do I mean? The Fed, and countless other economists, have a horrible track record of predicting anything as the last few years have shown. First, inflation wasn’t a threat only to see the Fed reverse course a few months later and engage in the longest/largest series of Fed hikes in years. And just this last year we saw them signal the end of inflation and intent to cut rates a number of times this year, only to flip flop on that already a couple of times. On top of their bad forecasting, people are then trying to both predict their movements/intentions as well as the markets likely reaction, which we saw this week’s up & down isn’t possible even if you knew the news in advance. It’s stupid on top of stupid.

Meanwhile, as Stephanie discussed at the event, and we’ve been advocating this year, there are a lot of great long-term opportunities both within the stock market beyond the Mag 7 and for that matter other asset classes that people are missing when they fixate on the Fed and a few headline grabbing stocks.

Does the current market concentration spell doom for markets? No one really knows, but as the piece from JPMorgan discusses below, highlighting some importance differences between today’s markets and the dot.com bubble, not necessarily.

More importantly there are plenty of ways to invest, even within the AI theme as Stephanie shared, beyond what people might know about. Working with the right partner, as we certainly strive to be for our clients, can help you keep your focus on the right controllables, as well as unearth opportunities with risk/reward profiles better suited for your story.

We hope you enjoy the upcoming video series, which begins with her background and philosophies this week and digs deeper into stories and outlooks as the week’s progress, as well as the great article below.

Have a wonderful weekend,

Tim and the team at TEN Capital

Is Stock Market Concentration a Warning Sign?

Written by: Stephanie Aliaga, JPMorgan

The economy and the stock market are not always playing to the same tune. In today’s financial market ensemble, a stable economy plays a familiar melody with some nuance around rate cuts. Meanwhile, AI has staged a dramatic crescendo—perhaps lasting too long for comfort.

The S&P 500 is up a stellar 45.8% since the start of 2023, but subtracting just one name from the index, Nvidia, cuts that return to 37.4%. Subtracting the top 5 names further reduces that return to 23.4%. While impressive tech performance has boosted the overall market, excessive stock rallies and 31 new all-time highs this year have raised concerns about a potential bubble.

However, there are reasons to believe this isn’t the case.

1. Risk appetite. During the dotcom bubble, rampant speculation surrounded young companies flaunting internet excitement before profitability. In contrast, today’s AI beneficiaries are already very profitable companies that make their money selling key infrastructure and resources to the rapidly growing market of AI adopters. Additionally, interest rates are high, IPOs have slowed to a trickle and global VC investments have fallen from their peak in 2021^[1]. While bullish sentiment has surely provided a boost^[2], the impact of earnings upgrades is likely more significant—the Mag 7 posted a remarkable +50% y/y earnings growth in 1Q24^[3].
    
2. Fundamentals. The Mag 7 account for a sizable 33% of market cap, but they also account for 39% of R&D spending, 23% of free cash flow and 16% of capex (see chart). The strongest are getting stronger, but they’re fueled on veggies and complex carbs, not short-term stimulants.
    
3. Shareholder return. The recent boost in shareholder return can also be attributed to tech strength. Certain mega-cap tech companies have announced substantial share buyback programs or first-ever dividend payouts this year. These announcements have contributed to a 6% increase in S&P 500 shareholder payout in 1Q24, and the S&P return-on-common-equity stands at a solid 18.5%.
    

Still, there are reasons to be cautious. Markets have a tendency to over appreciate the near term and under appreciate the long term. We think AI will lead to all sorts of business transformation and productivity gains in the long term, but recent performance has been driven by significant upgrades in near-term AI demand projections. If demand cools off unexpectedly, perhaps because the economy deteriorates, geopolitics, or capacity constraints become a binding factor, such projections could be overly optimistic. Further, pricing discovery is in its nascency and the costs to run complex LLMs are still massive. Once ChatGPT becomes integrated to your iPhone, how much would you pay for the premium subscription? How much should a small business pay for Microsoft’s CoPilot suite? If we moved the 9 billion daily searches in Google onto Chat-GPT today, could we supply a 10x increase in electricity demand^[4]?

The alarm bells may not be ringing like the dotcom bubble. Concentration today appears to showcase corporate resiliency and companies that are at the forefront of growth, but questions abound whether recent performance can be sustained. As such, investors can still enhance diversification by exploring overlooked areas of the market, within and outside of the AI value chain, that have strong fundamentals.

Market concentration is an issue of economic concentration.

Magnificent 7 stocks, % share of S&P 500 on specific metrics

Source: Bloomberg, J.P. Morgan Asset Management. Magnificent 7 includes AAPL, AMZN, GOOG, GOOGL, META, MSFT, NVDA and TSLA. Data are as of June 21, 2024.

Related: Investment Implications of MORENA’s 2024 Landslide Victory

^[1] 2024 Stanford AI Index Report. See Guide to Alternatives, page 61.

^[2] In Bank of America’s latest Global Fund Manager Survey, investors were most bullish since Nov. 2021 and the most overweight stocks since Nov. 2022, but sentiment was not yet extreme. The Mag 7 is a very crowded trade at 69% but investors have been trimming exposure—tech allocations have fallen to 20% overweight, off a 36% peak in Feb. 2024.

^[3] See Guide to the Markets, page 11. 

^[4] IEA, Electricity 2024 report.

Data, Just the Data

U.S. Initial Jobless Claims – fell by 17,000 from the prior week to 222,000 on the period ending July 6th. This was a new 5-week low, and well below market expectations of 236,000. 

U.S. Mortgage Application – eased by 0.2% in the first week of July. This loosely held the 2.6% drop from the final week of June, according to data compiled by the MBA. 

U.S. PPI – increased 2.6% YoY in June 2024. This was the most since March of 2023, accelerating from an upwardly revised 2.4% gain in May and above market expectations of 2.3%. 

U.K. Industrial Production – grew 0.2% MoM in May 2024. This was a rebound from a 0.9% fall in the previous month and aligned with market expectations. 

FR CPI – increased to 120.20 points in June from 120.11 points in May of 2024. The consumer Price Index CPI in France averaged 90.12 points from 1990 until 2024 and reached an all-time high this June.