AI-bubble in the making?

Nvidia’s impressive Q1 results and the $11bn revenue forecast for the second quarter blew investors’ minds away. 

Major US stock indices gained yesterday. The S&P500 added 0.88%, while Nasdaq 100 jumped almost 2.50%, thanks to a 24% rally in Nvidia which rocketed to a fresh-all-time high of almost $395 a share. The company is now just shy of a trillion-dollar valuation, and is worth more than Tesla (market cap of around $580bn), Meta (around $650bn) and more than Intel, Broadcom and TSM combined. 

So, we are naturally brought to ask whether this year’s tech rally hasn’t stretched too far. Fidelity’s MSCI Information Technology ETF, which allocates 23% to Apple, 19% to Microsoft and 6% to Nvidia was up by more than 3.50% yesterday, and 40% since last October 2022 dip. It currently trades 30 times the earnings, while the S&P500’s PE ratio is only around 22. 

In compassion, Nvidia’s PE ratio spiked to 219 yesterday.  

Consequently, we are probably seeing a bubble in the making in the AI related stocks. Although no one questions the potential of AI, the valuations seem to have gone ahead of themselves and it could soon be time for correction.  

Still no deal

The technology stocks were euphoric yesterday, but the rest of the sectors were much less appetizing. US debt ceiling talks continued, there was again some optimism on the headlines, but no deal has been reached and the clock is ticking louder into the June1st deadline. The US Treasury’s cash balance fell below $50bn on Wednesday, and as Janet Yellen warns so loudly, the US may not reach the mid-June safe zone, where the tax money will fall in, to avoid a default.  

If investors are not extremely worried about the debt ceiling talks, it’s because they know it’s just an unnecessary political theater and that the debt ceiling will end up being raised, anyway.  

But in the extreme event of a political accident, the consequences would be catastrophic. US and global stocks could dive more than 20% and the US’ self-induced economic crisis would push the world economy into a deep recession by the end of the year.  

Speaking of recession… 

Germany doesn’t need a US political accident to have a taste of recession. Data released yesterday revealed that the German GDP shrank 0.3% in Q1, following a 0.5% contraction the quarter earlier. Despite the mild winter and no energy shortage, the German economy – so reliant on cheap Russian energy - couldn’t avoid recession at the second winter of the Ukrainian war.  

As such, Germany became the first big nation to enter recession since the pandemic. High energy costs, high inflation and the aggressive European Central Bank (ECB) policy tightening took a toll on the world’s fourth biggest economy.  

The disappointing German growth gave euro bears a solid reason to send the EURUSD below a Fibonacci support. The pair tipped a toe below the 1.0730 level, the minor 23.6% Fibonacci retracement on September to May rebound, and is struggling to hold ground just above this level this morning. Slowing German growth, combined with a 4.5% fall in Spanish yearly PPI figures clearly softened the ECB rate hike expectations.  

Crude bounces lower after hitting important resistance 

US crude fell more than 3% yesterday, after hitting the 50-DMA the day before on Saudi Prince Abdulazziz bin Salman’s threat to sellers.  

Energy bulls found no solid ground to extend the rally above the 50-DMA, and the price of a barrel fell all the way down to the $70.80 pb.  

OPEC will likely announce another output cut to boost prices when it meets next week, but any OPEC-led price boost to market prices should be interesting top selling opportunity as the Chinese reopening story doesn’t give a jolt to the global economy, Germany steps into recession, US recession odds increase by the day, with or without the debt ceiling deal, and there is little reason for the slowing economic trend to reverse.  

And higher oil prices will only make global growth prospects worse, and may not even fill the coffers of OPEC as much as they wish.