Moneyball Reader Q&A: AI and Market Direction...

With trillions now pouring into artificial intelligence (AI) research, the market’s biggest mega trend has reached a critical turning point. And today, I’ll tell you all about it:

Video transcript:

Welcome to Moneyball Economics. I’m Andrew Zatlin.

Before we get started, I’d like to give a shout-out to Mary, who’s the director of our graphics department. She put together this amazing new banner for me, it’s got a great new logo, Moneyball Economics. And to cap it off, we’ve got this great background, which is the face of none other than Benjamin Franklin himself from the $100 bill. So thank you again, Mary.

I’d also, in the spirit of continuing to say thank-you’s, I’d like to give a shout-out to one of our subscribers, Michael B. Michael took the time to drop me an email with a couple of questions. I liked the questions. Thank you, Michael. And I’d like to share the answers with everybody. Folks, I’m reading your emails. I’m reading your questions. If you want to reach out and drop me a note, please do. At the bottom of the screen, you’re seeing my email address (Moneyball@MoneyandMarkets.com), go ahead and take advantage of it. I’d love to hear from you. Hit the pause button if you need to.

Let me go ahead and jump into Michael’s email with his questions.

So he says, “Hello, Andrew, I listened to your review of the jobs numbers, chemical industry indicator and other data, and agree, they all look like they’re going in a bullish direction. Yet I receive Adam O’Dell marketing declaring by his newsletter because there’s a significant drop in the market around the corner. It’s confusing hearing two different messages from the same channel marketing company. Do you see a significant drop on the horizon?”

Michael, let me share with you something that is really important for Money and Markets, and that is, we’re not some corporate entity with a homogenous narrative. You’re getting expert perspective using different pieces of information so that you can make the most informed decisions you can make. And guess what? I don’t disagree with Adam, that there’s going to be a pullback on the horizon. See, a lot of companies, they’re a little bubbly right now, they’re a little bit overbought. And I do think that there’s a big opportunity for them to be a little bit sold off.

At the same time, I’m looking at this market over the course of the year and I think it’s going to go up 15% overall. It’s not going to happen straight up and to the right, there will be pullbacks.

In fact, just a couple of weeks ago I was telling you, you want to play this volatility. You want to sell the rip and you want to buy the dip. And a couple of weeks ago we had a juicy dip, hopefully you followed my advice and bought into it.

In general, we have what’s called a “wall of worry.” That wall of worry is built brick by brick. What about tariffs? What about inflation? And yet, somehow we seem to overcome that wall of worry, and that’s what’s going to happen now. We’ll have some fits and starts. Trump is going to be a big factor in making those happen. But overall, the underlying economics say we’re going to have a first quarter rebound. We’re going to have companies stockpiling again, building up inventory.

We’re even going to have some pull in because of the tariffs. They’re getting a little bit nervous about what might happen to the stuff they need. But overall, we’re going to have a strong economy and we’ve got the Trump bump that’s going to push that strength forward. At the end of the day, a strong economy translates into a strong stock market.

That’s what I think is happening now.

Now go to the other part of your email. Again, you come up with a great question. It has to do with not just the broad market, but you dive into a specific sector, AI and high-tech. Folks, this is what Michael wrote. He said, “Last evening I saw Google, Microsoft, Meta and others expanding budget on AI. I think with the possible $500 billion announced from the SoftBank, that would make over a trillion dollars getting invested in AI by just a few companies. It seems like this is a place to front run the investment dollars for elevated stock prices. Your thoughts?”

Okay, Michael, my considered opinion is we are seeing an inflection on where you want to be in AI. If this was last year, I would say hardware. Right now, I’m thinking it’s going to be more on the software and services. And the reason I say that is, well, frankly, look at SoftBank, half a trillion dollars, that’s a sexy number to throw on the table. And yet, Masayoshi Son, the founder of SoftBank is the ultimate P.T. Barnum. He’s a huckster. He’s done phenomenally well. He’s a genius.

He, for example, helped to found the Chinese Amazon that is called Alibaba. That’s right, he’s one of the original founders. This guy has been there and done it. He understands high-tech a lot. He got his start as a fourth rate telecoms guy. He knows what he’s doing, and his company owns one of the major semiconductor companies out there, Arm Holdings.

So when he says he’s going to invest half a trillion dollars, well, we should listen, but at the same time recognize that he is P.T. Barnum at a certain level. It’s not his money. He’s going to invest. It’s everybody else’s, and he’s going to get a sweet management fee. And he’s also been known to throw things out there and not follow through, and he’s also been known to have some serious losses like WeWork. That was all him. But it doesn’t change the fact that AI is here. This is not some trend. This is the ability of people like you and I to interact with a computer in a human natural way. I guarantee you everybody’s going to want that.

But having said that, the hardware aspect of this opportunity, it peaked.

Now, what do I mean by that? Let’s take a look at some specific data points. In 2023, $154 billion was spent on AI. That jumped to 230 billion last year. Sounds great, right? $80 billion, one year of growth. And it’s going up this year supposedly to 320 billion, put aside the SoftBank stuff. Okay, another 100 billion almost, and yet it’s a slower growth. Okay? We were 50% growth in 2024. There’s a hope for growth of 40% this year. Then there’s other reports saying, oh, in 2028 we might hit 600 billion. That’s 23% annual growth.

Look, let’s cut the bullshit, the heyday of building out the AI infrastructure, we’re past that. Where we are right now is there’s still growth, but it’s not that sexy growth. And that means companies like NVIDIA are going to be in trouble because they’ve guaranteed 50% growth forever and ever and ever, and they’re not achieving it. Let’s take a look at this chart from TSM. TSM is Taiwan Semiconductor Manufacturing, they build NVIDIA’s chips.

As you can see, they’ve had a phenomenal growth. But that run is playing out. They’re slowing down. And by slowdown, it’s still phenomenal. Still 30% plus growth today. But you fast-forward to October, it’s going to be down to 20%, and if you have built a valuation around, say for example NVIDIA, that means 50% growth has to be delivered and you see 20% at the end of the year, guess what? Your stock price is going to get slaughtered.

You know how I know this?

I was at Cisco when they were in the exact same position back in 2001. I was at Cisco when, like NVIDIA, they were the world’s most valued company by market cap. I was at Cisco when they achieved just shy of their targets and the stock got crushed by 80%, but that’s the hardware side of life. My advice to you is I’m in semiconductors myself, my advice to you is maybe you don’t want to be so exposed to semiconductors if you don’t know the right companies to be in.

Where I am going is more on the software and service side, companies like Oracle and Palantir. Why? Once you build the highway, you don’t make money on that infrastructure. You make money not on what people are doing on the highway, but what are they doing on the off-ramp of the highway where the McDonald’s are, where the Shell gas stations are, where the shopping centers are and the hotels. That’s where the real profits are.

Look at Apple as an example of a shopping center off-ramp from the highway.

Apple basically invented the shopping center on the internet. You got off the highway, meaning information going from point A to point B, and you went to Apple to get your music, your entertainment, whatever it is you needed. They created this walled garden. They created a shopping center. Park your car, come on in, we’ve got everything you need. And they turned around to the vendors and said, we will guarantee that the electricity works, the space is available, we’re going to collect rent. We don’t know what those equivalents are in the AI world. We can assume that there’s going to be massive demand. We just don’t know demand for what yet.

However, I think companies like Oracle and Palantir are still foundational from the service perspective. They’re going to provide a lot of what is needed to run those services, and there’s a whole slew of others out there. There’ll be some new ones. There will be some existing ones like the Metas of the world who want to be part of this game going forward.

At the end of the day, we’ve discovered one thing. People have a lot of free time and they’re going to have even more free time, and the ability to access a computer directly is going to open up altogether new avenues of ways to fill that time. There’s a lot of money to be made out there.

As you said, a lot of sexy, big numbers are being thrown on the table. I do believe that a lot of that will happen. There’s also going to be a lot of overvaluation followed by collapses in stock prices. So be careful in this space. We’re in it to win it. Zatlin out.