TLDR;
This video discusses the current market trends, where tech and AI stocks are being sold off in favor of defensive names like Walmart and Coca-Cola. The author questions the logic behind this shift, as many software companies are still highly profitable and have strong competitive advantages. He also examines the repricing of tech stocks, noting that while some companies may have slower growth rates, others are still expected to grow at a healthy pace.
- Market favors defensive stocks over tech and AI.
- Questions the logic of selling off profitable software companies.
- Examines the repricing of tech stocks due to growth rate concerns.
Intro: Market Overview and Rate Cut Expectations [0:00]
The market is showing positive movement due to better-than-expected inflation data, which could lead to potential rate cuts. Previously, positive market data was viewed negatively as it suggested rates would remain high for longer. Current expectations are for two rate cuts in 2026, with most occurring in the latter half of the year. The video aims to analyze the current market dynamics, particularly the performance of software and AI stocks versus defensive stocks.
Heat Map Analysis: Sector Rotation [2:37]
An analysis of the year-to-date performance heat map reveals a clear trend: investors are selling tech, AI, and software stocks and moving into defensive names like Walmart, Costco, Home Depot, Exxon, and Chevron. While memory players like Micron and SK Hynix are performing well, the overall trend indicates a shift towards safety and away from growth sectors that experienced a bull market in the preceding two and a half years. This rotation presents potential opportunities for long-term investors, as the author believes that the underlying value of many large tech companies remains strong.
CPI Numbers and Pre-Market Action [4:06]
Inflation data came in cooler than expected, which is generally positive for the economy. While there are more positive numbers than negative, shelter costs remain a significant issue, and service inflation is accelerating in areas like airline fares and medical care. Food prices are also up, impacting consumers' wallets. Despite these concerns, the pre-market action suggests a potential relief rally, building on positive momentum from the previous week.
Market Inconsistencies: AI Disruption vs. AI Stock Performance [6:44]
The author points out the market's contradictory behavior: software stocks are being devalued due to the perceived threat of AI disruption, yet AI stocks themselves are also declining. This creates a paradox where both the disruptors and the disrupted are facing market challenges. The high valuations of private AI companies like XAI and OpenAI, which exceed those of profitable public software companies, further complicate the picture. The author questions the logic behind these trends, suggesting that the market is overlooking the fundamental strengths of established software businesses.
The Myth of "Vibe Coding" and the Strength of Established Platforms [7:57]
The author argues against the notion that AI can easily replace established software companies through "vibe coding." He uses examples like Shopify, Salesforce, Adobe, and Meta to illustrate the complexity and scale of these platforms, which are difficult to replicate. These companies offer comprehensive solutions, maintain robust infrastructure, provide customer support, and generate billions in profits. The author suggests that smaller AI startups attempting to disrupt these giants are more likely to be copied or acquired by the larger players, who have ample resources and cash flow.
Repricing Across the Board: Using Fiscal.ai for Analysis [14:25]
The video transitions to discussing the repricing of tech stocks, using Fiscal.ai to analyze revenue growth and margins. Microsoft is used as an example of a company with strong expected revenue growth and solid financials, trading at a reasonable multiple. The author then examines the margins of various software companies, including Intuit, Salesforce, Adobe, ServiceNow, Monday.com, Wix, and Shopify, noting that most have healthy margins.
Growth Rates and Market Expectations [18:50]
The analysis shifts to growth rates, with the author presenting data on Wix, Monday.com, Shopify, Salesforce, Adobe, and ServiceNow. While some companies are experiencing decelerating growth, others are still growing at a healthy pace. The market tends to compress multiples for companies with slowing growth unless they can demonstrate improving margins or other positive factors. The author emphasizes that companies showing accelerating growth, especially due to AI integration, are likely to be rewarded.
Overvalued Defensive Stocks: Walmart, Costco, John Deere, and Coca-Cola [22:57]
The video contrasts the valuations of tech stocks with those of defensive stocks like Walmart, Costco, John Deere, and Coca-Cola. Despite slower growth rates, these companies are trading at high earnings multiples. Walmart and Costco are trading at 44 and 50 times earnings, respectively, while John Deere is at 33 times earnings despite declining revenue. Coca-Cola, with a 2-3% growth rate, is trading at 24 times earnings. The author questions whether these valuations are justified, suggesting that the market may be overvaluing safety over growth.
Investment Strategy for Tech Investors [24:50]
The author concludes by advising tech investors to assess whether the stocks they own are likely to be higher in the future. If the answer is yes and the underlying businesses are strong, then the current market conditions may present a buying opportunity. He acknowledges the frustration of seeing stocks decline further after buying them, but emphasizes the importance of focusing on the long-term potential of great companies. The author also mentions his intention to sell his position in Alibaba due to ongoing concerns about investing in China, and to reallocate those funds to other promising companies.
