The reason for caution in the air is that, it is in my mind too often recently, after the market valuations this year (upcoming giga IPO), as some markets lunge into bubble territory and enthusiasm for the riskiest assets picks up, and the market booms on…
Inflation remains hot in US and picking up in EU, and is generally getting a little worse, though investors seem very willing to look past the current war and imagine the nice, clean recovery, with oil prices falling sharply.
The AI Capex boom continues to be one of the major driving forces for the economy, helping to cover up for a lot of softer growth in other areas… and that might well continue, and has continued to boost the market for the leading companies and create new champions who have emerged almost overnight (Like Anthropic, Micron, Dell etc).
This is a year which could bring a transition in market sentiment, as the “giant IPO that everyone is dying to own” market tends to create the kind of buy-at-any cost thinking which warns us we might be heading into a market top. That has been led by Cerebras and soon SpaceX, so the reception of the SpaceX IPO in about ten days will be a big sentiment driver, and it’s a little worrisome that they’ve reportedly already stepped back from hoping for a “at least $2 trillion” valuation and are now resetting the goalposts to “$1.8 trillion,” but, to be fair, that’s probably mostly marketing and rumormongering by the investment banks leading this deal. If SpaceX goes off well, it might well be followed in the coming months by Anthropic and OpenAI, which are both probably in the $800B/$1T valuation range, enough to make them the second and third biggest IPOs ever. IPOs can be both a big driver and a clear indicator of investor sentiment, and it’s hard to imagine that the market won’t see the first week or so of SpaceX trading as a signal about what happens next.
Higher living expenses have helped credit card and auto loan delinquencies creep steadily upward, with credit card delinquencies in particular almost back to the level they hit at the worst of the great financial crisis, and with auto loan delinquencies at new 21st century highs already.
And the stock market is in a historic boom — not quite an all-time bull market, but pretty close and at valuation extremes using any of the longer-term measures (like the CAPE ration)… so even though a high valuation for the market is not an immediate indicator of bad things coming, I still worry that the signs of a potential bubble forming in some extremely popular sectors are everywhere. We are definitely in an “exuberance” stage, driven in large part by enthusiasm for the AI investment cycle, rising defense spending, and the somewhat related space and aerospace boom, which is why that SpaceX IPO will be such an important indicator of sentiment… though I don’t know if we’ve reached the “irrational exuberance” part of the cycle just yet.
Time to be very cautious and double check and rebalance the portfolio for upcoming market shocks, though we cannot time it, we shall atleast prepare ourselves.
Busy And Useful 