The Dow’s monster win streak this week … but don’t trade in your AI stocks just yet … 300% gains in AI for Eric Fry’s subscribers … why the AI ship hasn’t sailed … strong macro data
This bull is no longer limited to tech stocks.
This past Wednesday, the Dow Jones (the least tech-heavy index of our big three stock indices) notched a win-streak of 13 consecutive days. That matched its longest winning streak since 1987.
Yesterday morning, the Dow was on pace to hit 14 days which would have been the longest streak going back to June 1897 (roughly one year after the Dow’s creation in May 1896).
Unfortunately, the selloff yesterday afternoon broke the Dow’s streak, so we had to put away the champagne bottles. However, the more important takeaway remains…
It’s no longer just a tech stock party.
So, what does history suggest will be the outcome of this newfound Dow bullishness?
Let’s jump to CNBC from Wednesday when the Dow’s streak clocked in at just 13 days:
Analysis of data from FactSet shows that the Dow Jones index has had 15 winning streaks of 10 or more consecutive days since 1929. Only four such rallies were sustained for 12 days, including the current rally…
In the week following 10 or more consecutive days of gains, stocks have previously held on to their profits, staying flat on average…
In the month after, on average, stocks rose just under 60% of the time in the month after a 10-day winning streak… When stocks went up, they yielded 2% on average…
The Dow Jones had a positive quarter after a 10-day streak of gains 70% of the time. When stocks went up, they returned 5% on average…
In short, get ready for more gains.
But don’t swap out your AI/tech stocks for the Dow Jones just yet
Last Friday, the Nasdaq 100 held a “special rebalance” for the first time in 25 years.
The was because the gains from Big Tech have grown so lopsided this year that the seven largest holdings in the Nasdaq 100 (all Big Tech/AI stocks) accounted for 55% of the performance of the entire index.
The stated goal of the rebalance was to “address over-concentration in the index by redistributing the weights” of Amazon, Apple, Google, Meta Platforms, Microsoft, NVIDIA and Tesla.
Going into the rebalance, there was some uncertainty about how the rejiggering would affect the index. It turns out, the impact was negligible.
As you can see below, since last Wednesday leading into the rebalance, the Nasdaq 100 fell not even 3%, and it has already recaptured most of it.
This buoyancy has been aided by strong Big Tech earnings this week – one of which was from Alphabet, which jumped 6% in the wake of its earnings beat.
On this note, a big congratulations to Eric Fry’s Speculator subscribers who are now up 300% on their Alphabet trade
Here’s Eric with more:
We received great news [earlier this week] from one of our core artificial intelligence (AI) positions, Alphabet Inc. (GOOGL). The leading internet search company posted second-quarter earnings results that exceeded analyst estimates… and delighted investors.
The stock popped nearly 6% on the news, which lifted [the call options on our Google trade] to a gain of more than 300%.
Eric’s profit update goes on to tackle an issue that I’ve been wondering about here in the Digest – lofty valuations.
There’s no denying that AI/Big Tech stocks are dominating today’s market. But they’re doing so at increasingly expensive valuations.
For example, as we’ve reported here in the Digest, the “Magnificent Seven” stocks (Microsoft, Apple, Nvidia, Tesla, Alphabet, Meta, and Amazon) which are nearly all AI leaders, have seen their stock prices and valuations explode this year.
Here’s Nasdaq.com from last week, putting some numbers on this:
…The average P/E ratio of the Magnificent Seven is 112, significantly higher than the historical average of 15 to 18.
Furthermore, individual companies’ P/E ratios also tower above the historical average, with Nvidia at 250, Tesla at 86, and Amazon at 312.
Is this a reason to stay away today?
Here’s Eric’s take, speaking directly about Alphabet:
On average, the 32 Wall Street analysts who follow Alphabet expect the company to post earnings per share of about $5 this year, and perhaps as much as $6 in 2024.
At that level of profitability, the stock would be trading for 26 times this year’s earnings and about 22 times the 2024 result.
That valuation is certainly not cheap, but neither is it “crazy” for a dominant AI play like Alphabet.
Congrats again to all the Speculator subscribers. To learn more about this trading service, click here.
Our hypergrowth expert Luke Lango also recently commented on today’s valuations
And like Eric, he doesn’t see elevated valuations being a significant stumbling block.
From Luke’s Daily Notes in Innovation Investor:
The equity risk premium (ERP) did drop to a new cycle-low of 0.79% [on Tuesday] because Treasury yields rose while equity multiples expanded to over 21X forward earnings.
Though these measures are rich relative to their averages over the past 10 years, they are actually in-line with their averages from the 1990s – which we view as a very fundamentally comparable period to today.
Therefore…we do think valuations are “fine” at current levels.
Luke is also quick to refocus his readers on long-term growth rather than short-term valuation. In his Daily Notes, he highlights a new report from UBS that calls AI a $300 billion opportunity.
Back to Luke:
UBS says global AI demand was about $28 billion last year. It sees that figure growing by more than 60% per year to $300 billion by 2027. That is huge growth.
If the AI market does really grow by more than 60% per year for the next five years (which we view as likely), then AI stocks will keep soaring.
This isn’t a bubble. It is a revolution.
On that note, if you missed last night’s AI Impact Event, we have a free replay available for you.
It was a huge evening, with thousands of attendees joining in to learn how Luke, Eric, and legendary investor Louis Navellier are positioning their subscribers for profits today.
They also unveiled a brand-new AI focused portfolio of nine stocks they believe are poised for a huge run in the coming years.
To be clear, it’s not just “AI stocks to buy,” it’s also “beloved stocks to avoid as AI could send them to zero.” They offer a special report of very popular stocks that could be in real danger from AI.
You’ll watch our experts discuss the threats and opportunities of AI, with the through-line of how to put yourself in position to create lifechanging investment wealth from it.
AI is, without question, the most disruptive technology of our lifetime. And if you’re in today’s stock market, that means you’re exposed to it – whether for better or worse. Last night’s roundtable discussion will help you navigate this tension, while preparing you for the changes AI is bringing to the world and the investment markets.
Finally, macro data this week suggests the bullishness can continue
Yesterday’s GDP report topped expectations and showed a resilient economy.
U.S. GDP grew at a 2.4% annual pace in the second quarter, blowing past Wall Street analysts who had forecasted a 2% increase.
Consumer spending, the main engine of U.S. growth, rose at a 1.6% pace from April to June, the government said Thursday. GDP also got a lift from corporate spending on equipment and structures such as oil rigs and new manufacturing plants.
To be clear, spending is slowing. While household spending was the biggest contributor to the increase in GDP, its 1.6% annual pace was a marked slowdown from 4.2% in the first quarter.
However, consumer confidence remains upbeat. That’s the takeaway from Tuesday’s survey from the Conference Board.
For those details, let’s return to Luke and his Innovation Investor Daily Notes:
The Conference Board’s consumer confidence index jumped to a two-year high in July, paced by a big jump in both the current conditions and the future expectations indices.
The move in the expectations index is particularly interesting because it continues what appears to be a bullish upward thrust from super-depressed levels below 70 to very-optimistic levels above 95.
Historically, such bullish upward thrusts in consumer expectations have coincided with the start of multi-year bull markets.
Remember: The consumer is the heartbeat of the U.S. economy. Their spending accounts for ~70% of GDP. Therefore, the big jump in consumer expectations provides further confirmation that the primary trends for the economy and the stock market are positive.
For our last piece of macro data, this morning’s Personal Consumption Expenditures (PCE) Price Index showed even more cooling. And this is big news because this is the Fed’s preferred measure of inflation.
With it dropping to new recent lows, it will take pressure off the Fed.
Here are the details from CNBC:
Inflation showed further signs of cooling in June, according to a gauge released Friday that the Federal Reserve follows closely.
The personal consumption expenditures price index excluding food and energy increased just 0.2% from the previous month, in line with the Dow Jones estimate, the Commerce Department said.
So-called core PCE rose 4.1% from a year ago, compared with the estimate for 4.2%. The annual rate was the lowest since September 2021 and marked a decrease from the 4.6% pace in May.
Bottom line: Inflation is cooling, the bull market is spreading, and we’re at the starting line of explosive AI-based investment gains.
Let’s take advantage.
Have a good evening,