Bubblicious Levels
The market keeps inflating and deflating its own bubble in real time
When talking about the surging stock market being powered by the epicenter of AI-related companies over the last few years, it’s impossible to escape the term “bubble”. Just look at the recent articles, of which there are countless more.
When I think of a bubble, I think of this Adam Smith line from Supermoney:
We are all at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know, by the rules, that at some moment the Black Horsemen will come shattering through the great terrace doors, wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no one wants to leave while there is still time, so that everyone keeps asking “What time is it? What time is it?” but none of the clocks have any hands.
One of the key components in my definition of a bubble is we’re mostly oblivious to the inflating of the bubble. That’s sorta the whole point. Everyone is dancing at the ball, has no idea or care in the world about the time, and will eventually be caught off guard when the music stops.
If the guy on the Titanic yelled “ice berg ahead!” 30 minutes earlier, we probably wouldn’t even know the same of the ship.
Going back to what Barry Ritholtz wrote last week:
It is a challenge for the crowd to simultaneously speculate on a bubble and accurately identify one as it inflates.
I go back a couple of years when the news du jour was “cracks developing in the commercial real estate market” and the subsequent chatter about rescue capital started to pick up. But there’s a significant difference between a rescue drill and an actual emergency rescue. If rescue capital is already lining up, by definition I don’t think of that as a rescue.
Could the constant bubble name-calling in the stock market be similar? Time will certainly tell, but I feel like a full fledged bubble is hard to fully inflate if people are calling it out in real time.
A perfect example is Oracle. The stock popped 36% in September after slightly missing their earnings estimate. The historic pop was powered by a massive multi-billion-dollar cloud-infrastructure agreement (widely reported to include a deal with OpenAI). That contract, along with several other large cloud deals, convinced investors Oracle was on track for a major AI-driven boom.
Analysts were using terms such as “blown away”, “in shock”, “absolutely staggering” and “momentous confirmation”.
Since then, the stock is down ~40% because they raised ~$18 billion in new debt to expand and fund this cloud/AI infrastructure, pushing their total debt above $100 billion. That has spooked some investors concerned about how fast Oracle can pay down that debt if AI/cloud monetization doesn’t scale quickly.
It’s as if we’re inflating the bubble and quickly pricking the bubble moments later to prevent it from getting to poppable levels.
Apple is another great example. Apple appeared to be the antisocial partygoer at the ball, drinking water in the corner while others shotgunned beers, and was left behind for doing so. During that same time frame where Oracle fell back down to Earth, Apple has performed incredibly well.
The main reasons for this is they have not taken on huge debt loads for AI data-center buildouts. Instead, they’re rolling out AI features that ride on existing cash flow and infrastructure and have framed “Apple Intelligence” as an incremental margin enhancer, not a capital-intensive reinvention.
Again, the BAC of the market seems to spike to dizzying levels only to be sobered up again shortly thereafter. There is still a very real possibility that a massive pullback is coming. Economic or geopolitical shocks still lurk around every corner and will take no prisoners depending whether or not a company’s AI strategy is fundamentally sound.
Whether you pick your own stocks and favor technology companies or are simply investing in market weighted S&P 500 index funds, you are very exposed to these technology companies. It’s been extremely rewarding as an investor.
But if you’re spooked, now might be a good time to take some chips off the table and re-allocate to other asset classes or sectors of the market which won’t be as impacted by the next inevitable AI-related headline. You can shift a portion of your portfolio toward steadier, slower-moving areas of the market like consumer staples, healthcare, or utilities. Some people lean into companies that pay reliable dividends, are exposed to more global markets, or choose equal-weighted funds that aren’t dominated by giant tech names.
We’re all trying to enjoy the ball without ignoring the clock. Whether this moment becomes a full-fledged bubble or just a series of quick mood swings is something only time will settle. A bubble being pricked to let some air out is less dangerous than one we’re inflating with a blindfold on.