Tech stocks got the wobbles in the US overnight, with the Nasdaq falling 2%. This earnings season has, by and large, shown that the big tech names have been beating earnings estimates. Palantir was the latest example, which reported EPS (earnings per share) and revenues which surpassed expectations. The company even provided a rosy guidance. Yet the stock, and tech stocks in general, slipped. The reason is that investors can’t shake the feeling that everything AI-related seems overstretched from a valuation perspective. The word ‘bubble’ is being thrown around, with fears of a repeat of the 2000 ‘dot com’ crash.
But are these worries justified? Valuations are indeed elevated, with the current forward P/E of the S&P500 hovering around 23, which is well above the historical average of approximately 17. So, stocks are looking quite pricey right now when using forward P/E as a measure. However, what differentiates the current AI wave from the ‘dot com’ era is that real products are being made and sold, in the form of chips and GPU’s which is generating real profits. Which was certainly not always the case during the ‘dot com’ boom. And secondly, US interest rates are heading on a lower trajectory, which provides an economic cushion to stocks, as opposed to what happened when the ‘dot com’ bubble burst, when rates were on the increase.
So, there are both similarities (stretched valuations) and differences (the direction interest rates are headed and actual profits being generated) between the current AI-fuelled rally and the ‘dot com’ era at the turn of the century. The AI boom mirrors the dot-com bubble’s hype but stands on firmer ground with real profits and applications. So, it may not follow the same fate as what happened to the stock market in the year 2000. But if investors do start to question if AI capex is being overextended or if earnings start to falter, the chances of a market correction could be on the rise.
Looking beyond the tech sector, the USD continued its ascent with the Dollar Index (DXY) reclaiming the 100 level. The British Pound has been struggling on budget concerns which aided the greenback, with the GBPUSD rate falling 1% over the last five days. Meanwhile doubts about whether the Fed will cut again in December continue to propel the Dollar higher.
The stronger Dollar dented the appeal of gold, with the precious metal losing ground and slipping further away from the $4k level. Gold has lost some of its lustre in the wake of the hawkish Fed messaging last week, with spot gold now trading around $3938, ahead of support at $3925, $3893, and further out at $3733. Resistance sits at $4004, $4051. With trade tensions having been de-escalated, at least for the time being, gold may be relying on a pullback occurring in the USD to make progress back towards the $4k level.
The rise in the USD has also applied pressure to the oil market. US oil slipped back to $60.20 ahead of support at $59.85 and $59.37. While on the topside, resistance awaits at $60.92 and $61.40. Markets are still trying to assess the impact of US sanctions on Russian oil giants Rosneft and Lukoil and how these will impact the global oil supply chain. Without these sanctions, it is probably fair to say that US oil would be trading at lower levels. Aside from these geopolitical issues, the direction of the Dollar could dictate where oil heads next, with any continued Dollar strength likely to be a headwind for oil.
Looking ahead - the ongoing government shutdown means that we are unlikely to get sight of the next batch of US Non-farm Payrolls (NFP) data (which ordinarily would be due for release this Friday). The expected absence of the NFP print places greater emphasis on the ADP (private payrolls data) to gauge the current state of health of the jobs market, despite its narrower scope. ADP is expected to show approximately 30k jobs created last month, but any downside miss or a negative print similar to last month could see hopes for a December rate cut from the Fed start to tick higher again.
