According to The Wall Street Journal, on an inflation-adjusted basis, technology companies have spent more in the last three years on data centers, chips, and energy than has been spent over the past forty years building out the nation’s interstate system. The massive amount of investments being put to work is stunning. But the Wall Street Journal asks the most critical question: Will they get their money back?

In their article “Spending on AI is at epic levels. Will it ever pay off,” the Wall Street Journal compares today’s AI investments to the late 1990s telecom investments in the fiber optic network. Furthermore, they remind us of some of the leading telecom companies, such as Global Crossing and WorldCom, that went bankrupt due to overinvestment. The internet and connectivity were truly transformational. However, from an investment perspective, they overinvested and could not produce enough revenue to pay their bills. Will AI generate enough revenue and soon enough to justify the massive investments? The article provides a few comments worth sharing:

David Cahn, a partner at venture-capital firm Sequoia, estimates that the money invested in AI infrastructure in 2023 and 2024 alone requires consumers and companies to buy roughly $800 billion in AI products over the life of these chips and data centers to produce a good investment return. Analysts believe most AI processors have a useful life of between three and five years.

This week, consultants at Bain & Co. estimated the wave of AI infrastructure spending will require $2 trillion in annual AI revenue by 2030. By comparison, that is more than the combined 2024 revenue of Amazon, Apple, Alphabet, Microsoft, Meta and Nvidia, and more than five times the size of the entire global subscription software market.

Morgan Stanley estimates that last year there was around $45 billion of revenue for AI products. The sector makes money from a combination of subscription fees for chatbots such as ChatGPT and money paid to use these companies’ data centers.

The AI tech giants predictably argue that they will be rewarded generously for their investments. Time will tell if they are right. As we share below, Hedge Fund investor David Einhorn disagrees and fears they are over their skis.
 

What To Watch Today

Earnings

• No earnings releases today.

Economy
 

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Market Trading Update

Yesterday, we discussed how retail investors are “all in” on the speculative market advance. Every dip is rapidly bought, and options trading is surging to historic records. However, this DOES NOT mean that the market will “mean revert” tomorrow and that you should be selling assets and moving into cash. During bullish market momentum surges, that would be a mistake, as the advance can last much longer than you believe possible. Notably, the speculation has spread from stocks to gold, emerging markets, momentum, and bitcoin, which are seeing record inflows.
 

While the speculative chase is on, and should be respected, the market, as shown below, is extremely overbought and deviated from its long-term means. Historically, such extreme deviations preceded more significant market downturns, which is only logical. However, the timing of that next downturn is challenging to predict. Such is why, as investors, we must remain invested while markets are rising, but pay close attention to the risk we are taking. Getting out too early can be as costly as staying in for too long.
 

The current risk to the market is that investors are chasing the least profitable, lowest-quality companies in many cases. In other areas, they chase assets with no fundamentals, bidding the price higher and creating rationalizations to justify those investments. In both cases, the eventual outcomes are historically poor.

While we are not bearish on the market currently, the risk is building that a correction will occur. Unfortunately, given the high levels of complacency and offside positioning, the selloff could be sharper than many expect. Furthermore, given the high levels of investor sentiment, a downturn of 10% will “feel” much worse than it actually is. It is in these environments where investors make the most mistakes.
 

Control your risk and ride the “bull” for now. Listen for the “8-second” bell and don’t overstay your welcome.
 

Dividend Stocks Are Out Of Favor

One of the market themes occurring with increasing regularity is the daily underperformance of safer, more conservative stock factors and sectors. To help us understand which stock sectors and factors are performing or not on any given day, SimpleVisor’s Core and Thematic portfolios can provide some insights. For example, on Wednesday, when the S&P 500 rose by .58%, five of the eleven S&P sectors were lower, and the large-cap value ETF VTV was flat on the day. Moreover, a glance at the SimpleVisor dividend models, shown below in the first graphic, highlights that investors shunned dividend stocks on Wednesday.  

The second graphic looks at the holdings of the Dividend Equity Focused portfolio. The portfolio is comprised of higher dividend, more conservative stocks. Further, it includes some of the top S&P 500 holdings to help it better track the broader market. As it shows, the large majority of the dividend stocks were red, while most of the top S&P holdings were up on the day.

For a longer-term confirmation of the trends we noted from Wednesday, check out the Risk-Range Report in the third graphic. The Staples, Real Estate, Healthcare, and Energy sectors, which include many companies with larger-than-average dividends, have underperformed the S&P 500 by over 20% over the last 52 weeks.
 

Is Private Equity Sending A Warning To The Public Equity Markets?

Alongside the rising interest in speculative assets, like some equities, cryptocurrencies, and precious metals, there has been a sharp increase in dollars chasing private equity investments. The graph below, courtesy of Jeff Weniger, shows that the stocks of the largest private equity companies have benefited from the increase in interest since 2023. However, as he shows, over the last few weeks, Blackstone, KKR, Apollo, and Carlyle have shown weakness. At the same time, the S&P 500 just hit another record high. It’s also worth noting that the index of the four private equity stocks rallied after the April tariff drawdown, but did not reach the prior high. We should be careful reading too much into the graph, but we would certainly follow the companies for clues they may provide about the chase for speculative assets.
 

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