The key points in this equity note:
- Most of the equity market strength the past week has come from AI related stocks while the majority of growth equity themes are actually down highlighting the shallow equity market.
- Valuation of semiconductor stocks has risen to the highest level since January 2010 and Nvidia’s valuation relative to expected revenue has now risen to levels that should alarm investors.
- The key risk for AI related stocks is now that expectations are set too high in which these stocks will only disappoint as past exuberance stocks have done.
Underneath the AI surface there is weakness in equities
When we observe global equities over the past week they were slightly down with the semiconductor theme basket standing out rallying 6.7% as the AI hype gathered momentum with Nvidia’s CEO talking about a new era lasting 10 years. However, if we look outside the segments related to AI then the vast majority of growth pockets in the global equity market were down last week with baskets such as Payments, Luxury, Energy storage, and NextGen medicine leading the declines.
A concerning development for equity markets is the concentration of positive contributors this year to market performance and zooming in further it is clear that AI related stocks have done the most part of the heavy-lifting. However, these dynamics are not without consequences. This frenzy to “get into AI” has pushed the semiconductor industry to its highest valuation ever measured on 12-month EV/EBITDA which is already factoring in expectations of EBITDA over the next year. At 18.7x the semiconductor industry is now valued 72% above the global equity market raising expectations to levels that might dearly disappoint investors over the coming years.