It’s the one night of the year that men securely control the remote control. (Do we have to give it back this time?) For one glorious evening – for reasons completely unknown to us simple men – our wives, girlfriends and significant others agree that watching a football game IS the path to happiness. We’ve been treated to watch up to 59 Super Bowls, depending on your age, with Super Bowl 60 between the New England Patriots and Seattle Seahawks set to kick off Sunday evening. Most people will remember the first Super Bowl they watched. For me it was Joe Montana and the 49ers overwhelming Dan Marino and the Dolphins. Others can’t forget local Clemson product William “The Refrigerator” Perry, Walter Payton (“Sweetness”) and the colorful cast of the ’86 Bears doing the Super Bowl Shuffle awkwardly on stage before they trounced the Patriots. Even when the games were blowouts, they were always spectacles and were a must-watch. The commercials themselves have taken on a life of their own.
Even though Tar Heel Drake Maye takes the field Sunday, for me the big game this year is overshadowed by a different kind of Super Bowl being played out in the financial markets. This AI Super Bowl game started in 2022 with the launch of ChatGPT as we saw Microsoft stock take off after its announcement. Who’s playing in this Super Bowl? It’s the AI Dreamers vs. the AI Bankers. Well, it’s Half-Time and the Dreamers are smashing the Bankers 35 to 10. But the Bankers have begun to gain some momentum. Wednesday, the Bankers scored big on Nvidia’s announcement that maybe they won’t be funding Chat GPT to the tune of $100 billion1. Because ChatGPT has $1.3 trillion in spend commitments with so many big name firms in technology with only a reported $13 billion in revenue, it’s gotten REAL, real fast. The removal of the promise of $100 billion was like a giant Jenga block that was ruthlessly tugged out of the AI stack of Hope. It appears to have destabilized the current market narrative and put the spotlight on the financing of the big AI firms, even on the same week that it was revealed that SpaceX and xAI are merging before an IPO this year.
Simultaneously, private AI company Anthropic announced plug-ins for their agentic Cowork software that focuses on workflows2, a core ingredient to enterprise software that will allow someone with zero coding experience to create their own HR or CRM software for example. Our own company is in the process of proving this can be done, and it is an existential threat to software companies, particularly ones with expensive subscriptions.
On top of that, the financing of all these technological marvel data centers is in question. Oracle was everyone’s darling in the Fall when they smashed earnings expectations but now banks and analysts are questioning if they have the capital to complete their huge datacenter construction projects3. Banks and venture capital firms are starting to ask some very basic questions on their loans that just maybe they should have been asking all along like: what’s your cash position, how much debt do you have and when is it exactly that you’re expecting to make money from this data center venture??? It’s like everyone just remembered that math does matter, and if your company’s debt-to-income ratio is 10 to 1, you’re going to have some major problems. Oracle announced today that its cutting 30,000 jobs as it tries to pay for its financial commitments. Just maybe the Bankers discovered their calculators at the bottom of their backpacks and realized that the circular financing of companies in the AI space, both public and private, were essentially trading revenue numbers as they invested in each other or resembled 3-team NBA Trades of players of equal value (no improvement for any team). They were passing the exact same money back and forth and calling them earnings projections. Start counting the beans, because don’t look now, the Bankers just scored another touchdown in the market Wednesday. Speaking of assets with no real cashflow, Bitcoin has been just crushed in the last couple of months and has now lost every bit of its gain since Trump was elected, officially down 6% since November 5, 20244.
There were some absolutely abysmal, blood red stocks on Wednesday’s report of Market Movers5. That has continued today (Thursday). While the overall index numbers didn’t look bad at all some big tech names, many of them software stocks, were just slammed. As of after hours on Wednesday, Advanced Micro Devices (AMD) was down a stomach-churning 17.3%. Applovin was down 16%. Palantir got thumped to the tune of 11.6%. Micron was down 9.5%. Lam Research was down 8.8%. Paypal was beaten down 20%. The list of AI and software-as-a-service (SAAS) names that got knocked down and are drooling on the 20-yard line today is long.
The market’s outlook on AI seems to be morphing. It’s like the alcohol just wore off on the plane ride home after a captivating, romantic honeymoon. We’ve just gotten into our first serious fight as a newlywed couple (AI promise vs. AI reality), as we just couldn’t agree on finances of buying a data center. And for the first time, we’re starting to look at each other squinty-eyed on the plane and questioning our commitment. What have we gotten ourselves into? For once, thankfully, I’m not speaking from experience. But today there’s a feeling that comes with the red numbers, that perhaps that Jenga block Nvidia yanked away from ChatGPT is the first salvo in an ugly war to come. Maybe we should start calling Nvidia CEO Jensen Huang “Jenga Jensen” because this week some blocks are a tumblin’. And maybe the threat to software companies posed by AI is a clear and present danger.
As an Investment Committee, we’re tasked to try to produce the best returns we can in your WTA Growth and WTA Christian Values Stock portfolios. We’re thinking ahead a few steps here. It could be that we are misreading the environment. It’s easy to do. What’s true one minute isn’t true the next. But we want to be nimble and flexible inside these model portfolios for our clients, meaning that we want to have the cash on hand ready to go should this be the start of a market event that leads downward. We’ve already had the valuation talk with you a couple of weeks ago – second highest in history, remember? So, we are creating a little cash in some of growth models but cutting a few companies that no longer fit our criteria. This will be a little dry powder for buying in if the market should tumble further.
We want to be able to have the flexibility to go shopping on your behalf if the market goes further south, so we are being proactive and creating that flexibility now. If it turns out the market doesn’t correct further, then we’ll simply have some more dough to enter some best ideas type of stocks in the future. If we’re not 100% invested and the market goes up from here then so be it. I would rather explain to you that we were being cautious and proactive than cavalier and oblivious to some warning signs. I would rather explain that you didn’t get another 4 or 5% on a bullish move because we were cautious, than explain that we lost you as much or more than the market on a bearish move.
This AI Super Bowl is like Super Bowl 3 in the markets. As it relates to the advent and influence of new technologies on corporate America, there have been 2 other real Super Bowls. The first was the PC and Software Revolution in the 1980s and 90s, when tech firms took away the market dominance of energy. The second was the emergence of the Internet culminating in the dot.com crash of 2000. And now we have this new AI Super Bowl that started in 2022. Who will win out? The incredibly streaky AI Dreamers or the predictable run-first AI Bankers? Who is Namath and who is Unitas remains to be seen, but we have hedged our bets here and traded on your behalf as the Bankers appear to be coming on strong. If you’d like to pick a side in Super Bowl 3 in the markets, then give your advisor a call with your picks and we’ll make it a part of your plan. Remember, if you listen to us, we’ll change your financial world … (Go Drake!!)
Sincerely,
Scott Wright
Portfolio Manager
The Wealth Training Academy
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Sources:
5US Market Movers (the stocks listed above will have changed by publication)
