One Engine, No Reserves

The S&P 500 is an AI CapEX ETF in Disguise

By David Nelson, CFA CMT

I’ve been on the road for the last week and just touched down back home. I wanted to get out this quick note before we start the week.

Markets are hitting fresh all-time highs on the back of one engine — AI CapEx. Until we get resolution in the Middle East and closer to the end game the Fed isn’t in a position to help. The spread between winners and losers is massive. This isn’t a stock market anymore. It is an AI capex ETF wearing the S&P 500 uniform.

AAPL capped off the MAG 7 earnings season with only NVDA left to report later this month. Even here with AAPL arguably doing little or nothing with AI it owes its elevated multiple to the biggest investment theme in a generation. Bulls figured out that while they don’t have their own AI engine, the App Store is going to act like a toll road taking their slice of the bounty.

84% of companies reporting have come in hotter than expected. In aggregate, US companies are reporting earnings that are close to 21% above estimates. If that’s how the quarter ends it will be the biggest beat since the monster Q1 quarter coming out of Covid in 2021.

The economy being weak is a political narrative not an economic one.

Markets are looking through the Iran conflict and even the Strait of Hormuz closure believing that one way or the other oil will flow again. While elevated oil is a drag on the US economy it is an energy heart attack in other parts of the world. I’m sure airlines all over are feeling the pain. I’m a commercial pilot and I just paid the highest price I’ve ever paid for aviation fuel.

The Fed

The Fed is stuck and even with the Powell-Warsh drama finally coming to an end. It is going to be very difficult for the new chair to get a consensus on FOMC policy in the foreseeable future. Headline oil even with a pullback is likely to delay any easing cycle. In the last meeting the vote was 8-4. That’s the most dissents since October of 1992. And it was on both sides. One wanted to cut and three wanted to remove the easing bias.

A Word of Caution

The bullish backdrop begs the question: Why have a defensive basket in your portfolio. The following is from last week’s Money Runner “AI or Bust” but lays out the need for a diversified portfolio even when an investment theme screams this is the only game in town.

Reversion to the mean is a powerful force. When 40% of index EPS growth comes from one theme, when dispersion is this wide, when valuation premiums on the leaders have gone vertical, the math eventually catches up. It always does. The question is when, and whether you have the room in the portfolio to absorb it without becoming a forced seller.

This is the part of portfolio management that doesn’t make it into the year-end target memos. Getting from point A to point B is one thing. The ride is something else. Drawdowns punish behavior, not just performance. Risk-adjusted returns are what compound over time and what keeps investors in their seats long enough to actually capture them.

Disclosure: "At the time of this article I currently hold shares in some of the companies mentioned as part of investment portfolios in funds I manage for Belpointe. Additionally, I may discuss other securities that are under consideration for future investment; however, discussing these securities is not a recommendation to buy, sell, or hold. My mention of these securities reflects my personal opinion and analysis at this moment and may change without notice. Please remember that all investments involve risks, including the possible loss of principal."