Head of Equity Strategy
Summary: Our bubble stocks basket is down 40% from the peak in February and sentiment is now the weakest in more than five years in this segment of the market suggesting investors are changing their risk preference and are beginning to adopt a change in their outlook for long-term interest rates. Inflation and higher interest rates going forward could easily extend the declines in bubble stocks so investors should be careful about how much exposure they have to this group of stocks. We also discuss the news today that Apple is reporting to its suppliers that demand is weakening ahead of the holiday season hinting that inflation is potentially beginning to impact demand.
Ever since our bubble basket (see constituents below) peaked in mid-February, before we had the first wave of higher interest rates and talk about inflation, it has been downhill with yesterday being a brutal session seeing the basket down 6% and 40% from the peak. The narrative fueled rally in bubble stocks, which we define as large companies with negative earnings expectations and EV/sales ratio above 8, have dramatically changed with the outlook for inflation worsening increasing the probability that low interest rates will remain for long. This naturally impacts bubble stocks because they are more interest rate sensitive as we recent wrote about in one of equity notes. In our view bubble stocks could go much further down if interest rates at the long end of the yield curve finally move higher respecting the inflationary outlook.
Our bubble basket is trading 19% below its 50-week average which is the biggest negative spread since inception in January 2016 suggesting we are entering a new period with a different rhyme in equities. Mega caps, high quality companies, mining and energy, logistics, semiconductors, cyber security themes will continue to do well in environment with higher inflation.
The table below shows the 40 stocks that are in the bubble basket, which will be reviewed in January, and despite the massive selloff the median 12-month forward EV/sales ratio is still 21.3x, and the median year-to-date return is -21%. The best performing stock is Cloudflare which delivers critical software for internet infrastructure such as streaming and load balancing of servers. The worst performing stock has been Yatsen which is a Guangzhou based cosmetics company from China which has not delivered on growth expectations but also caught up in the generally weak sentiment on Chinese equities. Despite the sharp selloff in bubble stocks the median price target remains elevated around 51% above the current prices of these bubble stocks.
| Name | Mkt Cap (USD mn.) | 12M Fwd EPS | 12M Fwd EV/Sales | Diff to PT (%) | 5yr return (%) | YTD return (%) |
| Kuaishou Technology | 213,499 | -0.85 | 16.2 | 56.9 | NA | NA |
| Sea Ltd | 140,384 | -1.26 | 17.3 | 56.6 | NA | 31.5 |
| Airbnb Inc | 130,635 | -1.31 | 28.1 | 19.3 | NA | 11.1 |
| NIO Inc | 94,795 | -1.59 | 18.0 | 57.0 | NA | -21.4 |
| Snowflake Inc | 84,570 | -0.87 | 71.5 | 22.8 | NA | 10.5 |
| DoorDash Inc | 67,743 | -0.19 | 17.6 | 46.4 | NA | 13.2 |
| Roku Inc | 59,111 | -0.26 | 23.1 | 87.3 | NA | -37.4 |
| Bilibili Inc | 51,601 | -4.76 | 18.2 | 69.6 | NA | -27.0 |
| Teladoc Health Inc | 41,124 | -0.30 | 20.3 | 74.7 | 420.6 | -53.3 |
| XPeng Inc | 37,228 | -2.41 | 15.0 | 23.4 | NA | 19.4 |
| Affirm Holdings Inc | 34,499 | -0.89 | 39.7 | 44.1 | NA | NA |
| BeiGene Ltd | 34,490 | -9.78 | 35.8 | 20.7 | 1,040.6 | 36.2 |
| Unity Software Inc | 34,299 | -0.35 | 32.7 | 16.8 | NA | -1.2 |
| Plug Power Inc | 32,156 | -0.18 | 68.1 | 34.2 | 2,467.1 | 8.3 |
| Seagen Inc | 31,016 | -0.11 | 15.9 | 20.1 | 137.3 | -9.6 |
| Cloudflare Inc | 28,050 | -0.08 | 46.1 | 36.4 | NA | 116.1 |
| Splunk Inc | 27,486 | -0.21 | 10.8 | 52.1 | 108.1 | -34.3 |
| MongoDB Inc | 25,201 | -0.98 | 34.1 | 8.9 | NA | 27.3 |
| Exact Sciences Corp | 24,752 | -1.14 | 13.3 | 61.2 | 474.2 | -39.4 |
| Gaotu Techedu Inc | 24,455 | -3.34 | 11.8 | NA | NA | NA |
| Farfetch Ltd | 23,465 | -0.66 | 10.3 | 51.7 | NA | -46.7 |
| DraftKings Inc | 23,186 | -1.16 | 26.5 | 105.9 | NA | -32.9 |
| GDS Holdings Ltd | 20,998 | -0.15 | 18.6 | 51.6 | 434.8 | -42.9 |
| 10X Genomics Inc | 20,458 | -0.32 | 38.9 | 36.1 | NA | 1.9 |
| Argenx SE | 19,397 | -10.72 | 105.2 | 17.7 | 1,656.0 | 8.8 |
| Alnylam Pharmaceuticals Inc | 19,214 | -4.77 | 21.0 | 13.8 | 332.8 | 38.4 |
| Ping An Healthcare and Technology Co Ltd | 18,942 | -0.91 | 11.6 | 95.5 | NA | -71.0 |
| Innovent Biologics Inc | 18,305 | -0.61 | 24.0 | 42.1 | NA | -17.9 |
| Guardant Health Inc | 16,826 | -1.50 | 40.5 | 64.4 | NA | -24.2 |
| Zai Lab Ltd | 15,781 | -2.52 | 87.5 | 166.4 | NA | -46.5 |
| Kingsoft Cloud Holdings Ltd | 15,710 | -2.56 | 9.6 | 120.5 | NA | -62.1 |
| Yatsen Holding Ltd | 15,665 | -1.17 | 10.7 | 54.8 | NA | -85.9 |
| Oak Street Health Inc | 15,461 | -0.46 | 11.1 | 83.6 | NA | -50.8 |
| C3.ai Inc | 15,370 | -0.79 | 69.6 | 86.9 | NA | -75.6 |
| Bill.com Holdings Inc | 15,319 | -0.19 | 57.4 | 45.9 | NA | 84.6 |
| Canopy Growth Corp | 15,279 | -0.90 | 24.2 | 31.6 | 12.2 | -59.3 |
| Appian Corp | 15,229 | -0.40 | 43.3 | 57.5 | NA | -58.0 |
| Avalara Inc | 14,770 | -0.16 | 21.3 | 62.9 | NA | -21.0 |
| Elastic NV | 14,429 | -0.44 | 20.6 | 29.3 | NA | -4.8 |
| Wolfspeed Inc | 14,240 | -0.59 | 21.3 | NA | NA | NA |
| Aggregate / median | 1,565,141 | 21.3 | 51.7 | 427.7 | -21.2 |
Is Apple demand suggesting inflation is becoming a problem?
For the past year Apple has experienced problems with getting enough semiconductors for its products including the iPhone 13 which was recently cut 10% on production due to supply constraints. But now the technology company is facing a different problem with Apple telling its suppliers that demand is weakening into the holiday season. Apple shares listed in Germany are down 1.7% and some its key suppliers were down 4-11% in the Asia session. While we have little information to go with here it could be an early sign that the current inflationary pressures are beginning to impact demand for higher priced consumer goods including smart phones.
AI: The good, the bad, and the bubble
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Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
