Interview, Other
A Tale of Two Markets
- The S&P 500 is up 8% year-to-date and the Nasdaq 16% year-to-date as of May 13, while the S&P 500 is up 16% and the Nasdaq 26% since March 30 lows.
- Semiconductors have surged approximately 70% from their March 30 lows despite ongoing geopolitical conflicts and elevated oil prices.
- Earnings per share (EPS) growth for the S&P 500 is tracking at +17% year-over-year, marking the sixth consecutive quarter of double-digit growth.
- Forward-looking expectations for the next 12 months of EPS growth have increased to +13%.
- Despite market gains, the S&P 500 price-to-earnings multiple has compressed from 22x to 21x, indicating earnings are driving the majority of index appreciation.
- Market performance is characterized by a "tale of two markets": a highly concentrated rally in AI stocks (hyperscalers, data centers, equipment) versus underperformance in cyclical equities.
- The anticipated "broadening out" trade into cyclical sectors (homebuilders, industrials, consumer) in early 2024 failed to materialize due to growth and inflation shocks.
- High oil prices and geopolitical instability have negatively impacted cyclical equities, leading to a rotation back into AI hyperscalers viewed as having inelastic demand.
- Inflation metrics (high PPI and CPI) and deteriorating growth numbers have shifted market expectations from potential Federal Reserve rate cuts to potential rate hikes.
- Goldman Sachs does not classify the current market as a bubble, defining a bubble as a total reversion to prior price levels upon a pop.
- Hyperscalers have committed to $755 billion in capital expenditure (CapEx) this year, representing a 38% year-over-year increase.
- Client risk appetite indicators are at five-year highs, and prime book semiconductor exposure is reaching record levels daily.
- The market is vulnerable to "two-way volatility" due to significant leverage in the system, specifically via short-gamma levered ETF products.
- Short-gamma mechanics mean leveraged funds must sell aggressively during declines, potentially turning a 3% fundamental drop into a 10% price correction.
- The AI investment theme has evolved from semiconductors ("picks and shovels") to hyperscalers (funding), data centers, and equipment.
- Recent AI trends include a surge in memory chips and fiber optic cables, with the optical networking theme up over 100% year-to-date.
- Goldman Sachs identifies liquid cooling as the next iteration of the AI trade, noting it can reduce data center cooling electricity consumption by up to 10x.
- The liquid cooling theme is currently up approximately 30% year-to-date as data centers seek to shift electricity usage from cooling to AI power distribution.
- Key market drivers to monitor over the coming months include 30-year Treasury yields crossing the 5% psychological threshold.
- The final phase of earnings season includes upcoming reports from the largest U.S. companies, which will provide further insight into AI CapEx allocation.
- Upcoming U.S.-China meetings are a critical catalyst, as China equities have been notable underperformers compared to Japan, Korea, and Brazil.