After a year of record-breaking gains, AI stocks may be showing signs of fatigue — even as the broader U.S. economy continues to defy expectations. In this week’s analysis, we examine whether the AI rally has peaked, what rising market valuations and shifting Fed policy mean for investors, and how retirees can stay positioned for income, stability, and opportunity amid evolving market trends.
Is This the Top for AI Stocks?
At a conference hosted by the Wall Street Journal in Napa Valley last Wednesday, OpenAI Chief Financial Officer Sarah Friar spilled some beans during an onstage interview:
In a bid to remain “the state of the art” in the industry and “be on the frontier chip,” (meaning semiconductors), Friar said the ChatGPT creator is thinking of ways to finance development of its signature AI models and grow.
Friar said… “This is where we’re looking for an ecosystem of banks, private equity, maybe even governmental.”
“Meaning a federal subsidy?” the interviewer asked. Friar replied…
“Meaning, first of all, the backstop – the guarantee – that allows the financing to happen. That can really drop the cost of the financing but also increase the loan-to-value, so the amount of debt you can take on top of an equity portion.”
“Some federal backstop for chip investing,” the interviewer said. Friar replied…
“Exactly, and we’re seeing that. The U.S. government in particular has been incredibly forward leaning, has understood that AI is almost a national strategic asset, and that we really need to be thoughtful when we think about competition with, for example, China.”
Are we doing all the right things to grow our AI ecosystem as fast as possible?
Let me reiterate that… “as fast as possible.” That’s all. Not profitable. Not sustainable.
I won’t argue that developing AI, or any industry, in the U.S. is important. I’m a fan of industry and jobs being created here in the U.S. just as much as anyone. But when we talk about finding good investments, we don’t want to bank on the idea of simply growing as fast as possible.
Late Wednesday, the Journal published a video clip of the above exchange, with the headline “OpenAI Wants Federal Backstop for New Investments.” Market observers rightly pounced on it. As the global news agency AFP said…
“The proposal – unusual for a Silicon Valley tech giant – would theoretically reduce OpenAI’s borrowing costs since the government would absorb losses if the company defaulted.
Such guarantees would also dramatically expand OpenAI’s potential lender pool, as many banks and financial institutions face strict limits on high-risk lending.”
OpenAI welcoming a “government backstop” isn’t exactly something we want to hear since the business has been linked to just about every AI infrastructure deal over the past few months and is central to the AI spending boom.
By some estimates, OpenAI has pledged approximately $1 trillion to AI infrastructure partnerships this year, and expectation for AI’s adoption has fueled a bull market since OpenAI’s GPT-4 debuted in early 2023.
It’s even more concerning when you consider OpenAI CEO Sam Altman says his company, the world’s largest private venture, won’t be profitable for years. How much government help are we talking about just to stay in business?
It’s reminiscent of the “too big to fail” banks during the financial crisis or any other industry, company, or person looking for a bailout. Friar went to LinkedIn last night to spin things…
“I want to clarify my comments earlier today. OpenAI is not seeking a government backstop for our infrastructure commitments. I used the word “backstop” and it muddied the point.”
Not really. Things are clearer than they’ve ever been, and skepticism about the high expectations around AI seems to be growing by the day. “Bad vibes all around,” wrote the social platform X account Wasteland Capital, summing up the story well.
Over the past couple of days, a few AI favorites have released their quarterly earnings. While they showed monster growth on both the top and bottom line, the shares fell. In short, investors are expecting more and more from these companies.
Let’s start with Palantir Technologies (PLTR), which provides advanced software to the federal government, police, and corporate clients that use AI and other technologies.
Palantir beat Wall Street’s expectations on both earnings and revenue – with sales jumping 63% (and passing $1 billion for the first time) and net income more than tripling. On the surface, that looks like a great quarter. But the stock still fell 8% on Tuesday, was down slightly Wednesday, and lost nearly 7% Friday.
One possible reason why shares were down:
Operating cash flow only grew 21%. (When the cash-flow statement doesn’t match up with the income statement, it can be an indicator of aggressive accounting. That’s something I’ll need to look into here.)
The story was the same for chipmaker Advanced Micro Devices (AMD).
AMD beat analysts’ estimates on the top and bottom line, with revenue jumping 36% to a quarterly record. The stock still fell about 3% on Wednesday’s open before recovering throughout the day, then fell more than 7% Friday.
AMD forecasts revenue of $9.6 billion in the fourth quarter. That’s still a strong growth rate of 25%. But it’s a slowdown from the 36% growth in the company’s third quarter – and that’s not what investors want to see in what is supposed to be the AI hypergrowth phase.
In an interview over the weekend, Altman got defensive after being asked a simple question: How can OpenAI fund $1.4 trillion in spending commitments on only $13 billion in revenue?
Altman’s response was to help the interviewer find a buyer for his shares.
And in his quarterly letter to shareholders, Palantir CEO Alex Karp said that it’s “difficult for outsiders to appraise our business.” (The stock currently trades at an insane price-to-earnings ratio of 460 and a price-to-sales ratio of around 130.)
Karp also went on CNBC to call investors that are short his stock “egregious” and accused them of market manipulation.
We’re not so sure short sellers are to blame. AI has been such a big story – and these companies have performed so well – that investors are expecting more and more from them. And with the big run-up in the stocks, investors are probably going to take any chance they can to lock in some profits. Palantir’s sky-high valuation and AMD’s slowdown in revenue growth are the reasons this week.
As Whitney pointed out in his daily letter Wednesday, Karp’s comments could also be bad news for the stock.
“A CEO behaving like this is one of the best “tells” of a stock about to collapse.”
To be clear, I have no reason to believe there’s anything fraudulent about Palantir. It just looks like one of the most extreme stock promotions I’ve ever seen.
When he wasn’t attacking short sellers (or those questioning his company’s valuation), Karp did give some thoughts on the AI sector’s health. In short, he does see some excess in the markets. But he also believes that the AI leaders will continue to get stronger for a long time. As he said in an interview with CNBC.
The strong companies are going to get much stronger, and the people pretending they’re doing stuff are going to disappear very quickly.
Of course, this brings back memories of the dot-com bubble (and even the bitcoin bubble in 2017) – where companies added “.com” (or blockchain) to their names to take advantage of investor hype in the new technology.
Even the winners of the dot-com bubble – like Amazon (AMZN) – saw their share prices take huge hits, taking years to return to peak levels. But we agree with Karp… The companies with solid (and real) AI businesses will likely be in great shape over time.
Many of the “others,” though, could lose all their value – and cost investors dearly.
At Decker Retirement, momentum will help keep us out of the loser AI stocks and in the winners.
US Economy
The ISM Manufacturing PMI unexpectedly fell in October, marking its eighth consecutive month in contraction, driven by contractions in production and inventories, even as the new orders and employment components improved.
The government shutdown has entered its second month.
The average US family health insurance premium has increased dramatically.
Source: Kaiser Family Foundation via Peter Mallouk
The Atlanta Fed’s GDPNow model, based on very limited data due to the ongoing government shutdown, is now tracking Q3 GDP at 4%, up from 3.9% on October 27.
US employers announced 153,074 job cuts in October, the highest October total since 2003, as companies cited cost-cutting and AI-driven restructuring.
Source: Challenger, Gray & Christmas
The year-to-date total has surpassed one million.
Source: Challenger, Gray & Christmas
ADP private payrolls rose by 42K in October, well above the consensus estimate. All the job growth was driven by large firms, as small- and medium-sized businesses shed jobs.
Recent US voters remain focused on the economy.
Source: AP Read full article
US Stock Market
Large-cap earnings are strongest across market capitalizations, though there has been some recent improvement in mid- and small caps.
Source: Truist IAG
Only a small portion of stocks is beating the S&P 500.
Source: Truist IAG
&P 500 Consumer Discretionary has reached an all-time high …
…while Consumer Staples has declined to the lowest level since April.
NVIDIA’s weighting in ACWI is pulling ahead of Japan’s. In other words, if NVIDIA were considered a country, it would rank as the second-largest in ACWI, behind only the United States.
Unlike the dot-com days, leading US tech companies are making plenty of money.
Source: WSJ Read full article
US equities are trading at a 53% premium relative to the rest of the world as US equity markets continue to price in much higher long-term earnings growth than other developed markets.
Great Quotes
“All that we are is the result of what we have thought.” – Buddha
Picture of the Week
All content is the opinion of Brian Decker
