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AI-Led Tech Stocks Rebound Amid Economic Uncertainty: Navigating the Volatile Trading Landscape


John Mason:

The most unprofitable item ever manufatured is an excuse.

The AI craze has taken the world of trading by storm. Tech stocks, like Facebook, which saw their performance take a nosedive, have rebounded with a vengeance. The idea that we were to experience a slowdown in economic activity has not come to fruition, at least, not yet. Many experts, including the head of JPMorgan, Jamie Dimon, assumed a potential slowdown. The dip in early 2023 also created an environment where excess capital was waiting on the sidelines, and the re-investment created a shift towards tech stocks, with AI taking front and center stage. Usually, right before a recession, you see certain leading indicators, such as the inverted yield curve, inflation ramping up, etc., but historically there are always false indicators. The tail end of the stimulus from COVID seems to have some steam left in it, and with unemployment at the lowest level, the appetite to invest seems to still be there. That said, the tailwinds lifting up the stock market are concentrated in the tech stocks, and it is unclear if the rebalancing will lead to a downturn in the tech space and an uptick in small caps. Certainly, the VIX between the S&P 500 and Small Cap Stocks (Russell 2000) had diverged, and now we see a convergence, led by an increase in VIX for the S&P 500, which typically moves the opposite way from the S&P 500. PE ratios for key tech stocks are at an all-time high. NVIDIA's PE ratio is at nearly 74 when typically we would expect a PE ratio between 20 and 30. Could we see a fire sale anytime soon? Possibly. Usually, you buy when the VIX is around 33 or higher, and sell when it is about 12 or lower. We are now at a VIX of 16 for the S&P 500 and we were at around 12 not short ago. Has the madness just started? Weigh in, would be great to hear your opinion.