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Bets on Emerging Market Growth Stocks Soar Amid Overstressed US Equities

Equities in emerging markets have become increasingly attractive. Equity investors and analysts increasingly turn their attention to emerging growth stocks on optimism that they pose significant upside potential. The push comes amid growing concerns that growth stocks in the US might be overstretched after a strong bull run in the first half of the year.

Emerging Growth Stocks Outperformance

Likewise, the MSCI Emerging Markets index, which tracks emerging growth plays, is poised for a 5% gain this week, its best rally since late last year. The index has outperformed the overall US stocks for the first time in seven months.  Some stocks that have performed exceedingly well are in sectors sensitive to economic growth and consumer demand segments.

Emerging market growth stocks are rising at a faster pace than value stocks in the US, one of the reasons why investors are turning their attention to them. With the MSCI Emerging market index outperforming the S&P 500, economists expect the trend to continue as emerging economies’ gross domestic products grow 3.2% quicker on average than in richer countries.

Concerns over the global economy plunging into recession have waned significantly, going by the solid economic reports. The US going slow on monetary policy tightening at the back of growth in the labor market and solid retail and manufacturing sector have helped shrug off concerns about the global economy’s health.

Improving Economic Outlook

A solid US economy growing at an impressive rate is also helping support some of the emerging markets that rely on it as a key destination for products. A resilient US economy is a key destination for exporting nations, therefore, offering support to emerging markets.

Signs of waning inflationary pressure should continue encouraging a dovish monetary policy stance from the FED highly needed to support the US economy. At the start of the year, there were concerns that the US would plunge into recession if the FED persisted with its aggressive monetary policies. With the prospect of rate cuts becoming increasingly clear, the US economy looks set to remain in a phase of robust growth, something that should continue supporting emerging markets.

Optimism about economic growth is the catalyst behind aggressive bull strategies in the market. Investors are increasingly looking for ways to multiply equity returns in some battered sectors. Consequently, emerging markets have emerged as a battleground.

Likewise, investors and analysts are increasingly focusing on stocks of companies in consumer discretionary sectors like e-commerce, retail and automotive in emerging markets. The sector is likely to outperform on robust economic growth owing to increased consumer spending. In addition to consumer discretionary stocks, the focus is also on infotech and communication stocks that continue to bounce back after a long period of consolidation.

Risks In Play

Nevertheless, a cloud of uncertainty hangs in the air as the global economy is not yet out of the woods. Rising energy costs with oil prices ticking higher and aggressive interest rate hikes in recent years could bite in the long run. There is still the prospect of the US economy experiencing a mild recession due to the high-interest rate environment. The US economy plunging into recession could deal a big blow to sentiments in emerging markets equities.

US Dollar Selloff Accelerates as Hedge Funds Turn Net Sellers

Dollar weakness remains the central theme in the forex market, a situation fueled by hedge funds turning net sellers for the first time since March. The currency has shed more than 14% since it peaked above the 114 level against the basket of other major currencies last year.  The index breaking through the 100 barrier level and slumping to 15-month lows underscores the increased selloff as other major currencies turn bullish.

Greenback Selloff

The prolonged slump that began late last year has been exacerbated by the US Federal Reserve turning dovish after aggressive monetary policy tightening. The dollar rallied on the Fed hiking interest rate at the fastest pace in history in the race to bring inflationary pressures below the 2% level. With the central bank appearing to have hit the end of the interest rate hike cycle, the dollar remains under immense pressure as other major currencies gain.

The easing of inflationary pressure in the US has eased the prospect of the Fed hiking interest rates. With the prospects of rate cuts becoming increasingly clear, the dollar looks set to be on the back foot in the foreseeable future. Brad Gibson, a co-head of Asia Pacific fixed income at AB, believes the dollar has peaked, and there is room for other currencies to perform better in the second half of the year.

Yen and Emerging Currencies Opportunity

Amid the prevailing dollar weakness, investors are increasingly lining up bets on currencies likely to gain from the greenback weakness. Focus has since shifted to other currencies, with the Japanese Yen and the Australian Dollar turning bullish amid the dollar’s weakness. Analysts at AllianceBernstein and UBS Asset Management believe it is time for other currencies, especially from emerging markets, to recoup some of the losses incurred as the dollar strengthened across the board.

The Yen has turned bullish in recent days plunging below the 140 barrier against the dollar on expectations that it will benefit amid growing fears of a US recession. Speculations that the Bank of Japan might tweak its ultra-loose policy have also helped strengthen its course against the greenback.

Emerging currencies are also on the front foot against the dollar, with an MSCI gauge for such currencies gaining 2% year to date after slumping by more than 4% last year. The gains are expected to continue, especially on the dollar index tanking below the 100-level barrier.

According to UBS Asset analyst Shamalia Khan some of the emerging countries’ currencies to watch include Brazil, Mexico and Chile. The Latin American currencies have strengthened against the dollar, with the Colombian Peso gaining more than 18% against the greenback.

US Economy Resilience

However, there are analysts that hold a contrary opinion insisting that the US dollar weakness may be curtailed.  Brendan Murphy Money, a manager at Insight Investment, believes a US economy that appears resilient on many fronts could help curtail dollar losses.

The fact that there are growth concerns in other parts of the world should continue to make the dollar attractive. The dollar has always performed better and strengthened in times of economic growth concerns as a safe haven.

Morgan Stanley Bullish on Japanese, South Korean and Chinese Semiconductor Plays Over AI Boom

The artificial intelligence theme continues to dominate sentiments and outlooks in the equity markets. While the focus has been on US companies with exposure to revolutionary technology, Morgan Stanley analysts believe there is also value to unlock in Chinese, South Korean and Japanese semiconductor plays.

Morgan Stanley Upgrades

The US investment banker has upgraded the Chinese semiconductor sector to attractive from inline. The upgrade comes amid a big tussle between the US and China over semiconductor technologies. The US has imposed a ban on US companies sharing their semiconductor technologies with Chinese partners over national security concerns.

Morgan Stanley strategists have also upgraded South Korea’s semiconductor plays led by Samsung Electronics Co and SK Hynix. The Japanese chip sector, on the other hand, has been upgraded to attractive from Inline. According to analysts, tech deflation, price elasticity, and strong artificial intelligence demand will trigger the next upcycle in the market.

Morgan Stanley’s bullish view on the region’s semiconductor plays comes on upgrading some names in October. Initially, it targeted specific plays in South Korea and Taiwan. With the chip gauges in the two countries rallying by more than 25%, it’s become increasingly clear the sector is experiencing tremendous growth amid increased focus and use of AI innovations.

AI Boom Earnings Boost

The upgrades come when the semiconductor industry is enjoying robust growth. Revenues linked to semiconductors for powering artificial intelligence have increased by 1.7% since April. Nvidia has been one of the brightest spots in the sector, delivering better-than-expected first-quarter results. Its market value has more than doubled as it remains investors’ favorite for gaining exposure in the sector.

Strong demand for chips to power artificial intelligence solutions has been the catalyst behind renewed attention and focus on caps stocks in the market. Chip giants delivering better than expected results has also helped strengthen investor sentiments in anticipation of further increase with increased adoption and use of AI solutions

Some semiconductor plays have already started revising their earnings estimates upwards as the AI boom continues to fuel strong demand for the chips, unlocking new revenue opportunities. Taiwan Semiconductor is one of the companies that has seen an increase in orders over the past few weeks.

Companies developing graphics processing units or GPUs stand to be the biggest beneficiaries of the AI boom. With Nvidia indicating that $1 trillion of data center infrastructure will have to be upgraded to supper heightened computing power due to AI, there are tremendous opportunities for chip companies.

AI Boom Disruptions

While generative artificial intelligence is expected to accelerate productivity and prosperity due to increased computing power, it is also expected to trigger profound disruptions in some sectors. With more business activities from sales and marketing becoming embedded in software, some people and sectors are expected to lose out.

The transformation and the need for enhanced efficiencies are expected to put pressure on the labor force, especially higher-wage workers. Workers whose activities were initially considered immune to automation stand to pay a high price. Reports indicate that about half of workers’ hours could end up being automated with AI, thus rendering thousands of people jobless. There is already an indication that up to 60% of jobs could disappear due to automation-powered AI tools.

Bond Managers Bullish Despite Risk of Fed Hike on Resilient Economy 

The US Federal Reserve pausing interest rate hikes without showing signs of cutting continues to rattle sentiments and outlook in the bond markets. Initially, expectations were high that the Fed would start cutting interest rates at the end of the year to help steer the economy out of the risk of recession.

Interest Rate Uncertainty

However, that appears not to be the case, as the economy has held steady with solid economic reports affirming resiliency. A solid job market and a sticky inflation that refuses to come down to the recommended 2% could force the Fed into a rate hike, which could be detrimental to the bond market.

Despite the ever-growing risk of the Fed refraining from interest rate cuts, some bond managers maintain their bullish view of the government debt. The trade is looking riskier by the day as the prospect of a Fed hike increases, which could affect current bond prices, affecting returns. Bond prices have a negative correlation with interest rate hikes.

Whenever the Fed hikes interest rates, bond prices decline as most people buy new bonds offering higher yields. Likewise, with the US economy remaining resilient amid the fastest interest rate hikes in modern history, the prospect of a rate hike rather than a cut remains strong, something that could take a toll on bond markets.

Amid the uncertainties, bond managers at Brandywine Global Investments Management, Columbia Threadneedle Investments, and Vanguard Group are optimistic about fixed-income rallies in the bond markets.

On the other hand, strategists at JPMorgan Chase strategists are becoming increasingly skeptical about the bond markets. The strategists have since ditched their recommended long position in five-year treasuries amid the US monetary policy uncertainty amid a resilient US economy.

Bonds Outlook

The risk in the bond market became much clearer last week after unexpected solid data on jobs and signs of economic growth with a higher GDP reading drove short-term treasury yields higher. Such yields are susceptible to interest rate hikes. Likewise, a strong print from the non-farm payroll report on Friday could be another catalyst to trigger risk concerns in bond markets.

Facing the heightened risk and increased volatility amid concerns that Fed could hike interest rates, some bond managers have opted to stay on the side. Bond bulls, on their part, remain confident that the Fed won’t hike until the current rates take full effect.

In addition, they remain confident that the Fed hiking interest rates could trigger significant risk in the market as the one involving regional banks early in the year. A trigger of any risk factor is likely to force investors into safe havens, with bonds remaining a preferred option owing to their high yields of about 5%.

With the market pricing the risk of recession given the high-interest rate environment, interest rate hikes will remain a possibility, something that favors the bond prices. However, with the housing sector showing signs of rebounding amid the high-interest rate environment, the economy could withstand any further monetary policy tightening.

The bond market’s outlook is highly dependent on economic data and whether the Fed is confident enough to pursue further hikes.

5 Surprising Stocks to Own Now

There’s been a good deal of market uncertainty over the last year.

All thanks to inflation, interest rate hikes, fears of recession, Russia, and the collapse of Silicon Valley Bank, which triggered a sell-off in bank stocks, forcing regulators to backstop the industry. And while markets are still unpredictable even now, there are plenty of safe investment opportunities to jump into. In fact, we found five in some of the hottest, fastest-growing industries to buy now.

Piedmont Lithium (PLL)

Let’s start out with the red-hot lithium story.

With accelerating demand for electric vehicles, and all things green, there’s significant demand for lithium with little supply. Sure, Goldman Sachs and Bank of America want you to believe we’ll see a lithium surplus this year.  

“There could be a surplus of lithium in 2023 as higher supply volumes are set to supersede slowing demand for the metal,” said Bank of America Securities’ head of Asia Pacific basic materials, Matty Zhao. “We see a lot of supply coming out from lithium mines … We are expecting 38% lithium supply growth this year. That’s why 2023 is likely to turn into a surplus year for lithium.”

The prediction is honestly laughable.

According to Stellantis CEO Carlos Tavares, there may not even be enough lithium for EVs. 

“We know that we need lithium. We know that we are not producing as much as we need. We have right now 1.3 billion cars (that are) internal combustion engine powered on the planet. We need to replace that with clean mobility. That will need a lot of lithium. Not only the lithium may not be enough, but the concentration of the mining of lithium may create other geopolitical issues,” he told Detroit News.

Even major automakers—like Ford Motor and General Motors – are racing to secure supply with deals with Albemarle and Lithium Americas, for example. 

One of the companies benefiting from the lithium story is Piedmont Lithium, a $1.1 billion lithium company based out of North Carolina.

For one, Roth MKM analysts just raised their price target on PLL to $190 from $150 a share, with a buy rating. All thanks to its Definitive Feasibility Study for its Tennessee Lithium Project demonstrating strong economic viability. 

Two, North Carolina regulators just asked the company for additional information to approve the company’s mine permit application.  If all goes according to plan, Piedmont’s North Carolina mine could become one of “America’s largest sources of lithium for electric vehicle batteries for Tesla Inc. and other automakers,” as noted by Reuters.

Three, in early 2023, the company amended its supply contract with Tesla. Under the new contract, Piedmont Lithium will supply approximately 125,000 tonnes of spodumene concentrate to Tesla between the second half of 2023 and the end of 2025.

SoundHound AI (SOUN)

By now, you’re familiar with the artificial intelligence story. 

Grand View Research says the global AI boom could grow from about $137 billion in 2022 to more than $1.81 trillion by 2030. All as it transforms just about everything, about well, everything, including healthcare, governments, transportation, manufacturing, education, the media, even customer service. 

While we can always look at AI heavyweights like Alphabet, Microsoft, Nvidia, C3.AI, and Palantir, for example, the big payoff could come from the lesser known AI companies, which could eventually find themselves an M&A target.

Look at SoundHound (AI), a leader in conversational intelligence, offering voice AI solutions that let businesses offer incredible conversational experiences to their customers, for example.

Granted, that may not sound exciting.  But consider this.

The company is working to integrate voice assistants into vehicles and restaurants, both of which could bring in more than $500 million a year in revenue for the company. Even better, according to Automotive World, about 90% of new vehicles are expected to have embedded voice assistants by 2028. Another big plus for SOUN.

Also, not only is the company already seeing an “incredible surge in demand for conversational AI,” it just reported a 56% jump in revenue year over year. Gross margins jumped to 71% from 59%. And, according to CFO Nitesh Sharan, “Our top-line grew by 56% and every cost category improved sequentially, fueling steady progress towards profitability.”

Analysts over at Cantor Fitzgerald doubled his price target on SOUN to $6.20 from $2.80, with a buy rating.  SoundHound is one of the few companies that can take advantage of the AI frenzy currently occurring at every business across the globe,” he noted.

Viking Therapeutics (VKTX)

Obesity is a massive problem in the U.S.

In fact, you could say it’s bursting at the seams. According to the World Health Organization, global obesity has tripled since 1975.  In 2016, more than 1.9 billion adults were overweight. About 650 million were obese. About 39 million children under five were overweight or obese in 2020. Then more than 340 million children, ages five to 19 were considered overweight or obese in 2016. Unfortunately, when these numbers are updated they could be worse.

While regular diet and exercise could help prevent obesity, we may have the next best thing with medication.  That’s where Viking Therapeutics (VKTX) may benefit. At the moment, its VK2735 treatment is supposed to stimulate incretin hormones, which trigger a feeling of fullness, which can lead to possible weight loss.

Phase 1 trials with the treatment showed that patients lost 6% of their mean body weight, as compared to a placebo. Phase 2 trials are expected to start soon.

Even better, the company is in Phase 2 trials for a treatment of NASH, or non-alcoholic steatohepatitis, which is already showing positive results.  

In May, for example, the company “announced positive top-line results from its Phase 2b clinical trial of VK2809, the company’s novel liver-selective thyroid hormone receptor beta agonist, in patients with biopsy-confirmed non-alcoholic steatohepatitis (NASH).  The study successfully achieved its primary endpoint, with patients receiving VK2809 experiencing statistically significant reductions in liver fat content from baseline to Week 12 as compared with placebo,” as noted in a company press release.

Better, analysts at Roth MKM initiated a buy rating on the stock, with a $32 price target. They believe VKTX could have a blockbuster opportunity in a $26 billion NASH market. They’re also exciting about the company’s obesity drug, and see peak potential sales of $6.1 billion by 2035.

Roblox Corp. (RBLX)

Apparently, the demise of the metaverse has been greatly over exaggerated. That’s according to Lego and Epic Games, which partnered to launch new experiences in the digital world and the real world. Apple just launched its Vision Pro product, which gives it access to the metaverse. Even Nike is jumping into the metaverse with Fortnite to build a presence.  

While we can always buy Apple or Nike stock to take advantage, another hot metaverse stock to consider is Roblox (RBLX).  Starting out as a gaming platform for kids, it’s now one of the top destinations for immersive gaming for other age groups, too. 

Even better, the company just announced positive sales numbers. Bookings, for example, were up 23% year over year through April. Revenue jumped 22% year over year to $655 million. Daily average user growth was also up 22% year over year to 66 million. Plus, users spent about 14.5 billion hours interacting with RBLX content – up 23% year over year.

Analysts seem to like RBLX, too. Benchmark analysts just upgraded the RBLX stock to a buy rating. Roth MKM upgraded RBLX to a buy. Barclays raised its price target to $32 from $28, with BTIG raising its price target to $60 from $55. 

Canaccord also initiated coverage with a buy rating and a price target of $48 a share, and noted: “Bookings growth is anticipated to outpace expense growth moving through 2023 and into next year, which should contribute to margin expansion. The company is also targeting free cash flow at 25%+ of bookings over the long term,” per Seeking Alpha.

Enbridge (ENB)

Or, if you’re looking for safety with a high-yielding opportunity, there’s Enbridge (ENB). 

With a yield of 7.1% (which is higher than the broader market), the company offers safety in the energy infrastructure space, operating the second-longest natural gas pipeline in the U.S., North America’s longest crude oil pipeline, and a high-growth renewable power generation business. With regards to its renewable energy business, “projects in operation or under construction (and their 2,173 MW net generation capacity) are enough to meet the electricity needs of about 966,000 homes,” says the company.

The company also has about $12.9 billion worth of commercially secured capital projects that are under construction. Expected to come online through 2028, those projects include natural gas pipeline expansions, an LNG export terminal project, and offshore wind project in Europe.

Even better, Enbridge has a strong history of dividend payouts. The company has paid dividends for over 68 years.  Most recently, it declared a quarterly dividend of $0.8875 per common share, which was payable on June 1, 2023 to shareholders of record on May 15, 2023. 

Apple Breaks New Records: How It Reached a $3 Trillion Valuation

Apple’s shares have risen more than 20% in 2023, reaching a record high of $190.74 on June 30, 2023. The company’s market value is now above $3 trillion, making it the first company to achieve this feat. Apple is also the first company to cross the $2 trillion mark, which it achieved in August 2020. Apple’s valuation and growth are impressive compared to other big tech companies, such as Microsoft, Amazon, Alphabet, and Facebook. These companies have also performed well in 2023, but none of them have reached the $2 trillion mark yet. Microsoft is the closest with a market value of $1.9 trillion, followed by Amazon with $1.7 trillion, Alphabet with $1.6 trillion, and Facebook with $0.9 trillion.

A Profitable and Innovative Leader in the Tech Industry

Apple is a strong and profitable company that has a loyal customer base, a diversified revenue stream, an innovation capability, and an ecosystem of devices and software. The company has a trailing 12-month net income of $86.8 billion, which is more than the combined net income of Nvidia, Tesla, Meta Platforms, and Microsoft ($85.4 billion). The company also has a trailing 12-month return on equity of 133%, which is higher than any of its peers. The stock has a 52-week range of $124.17 to $193.15, and a market capitalization of $3.028 trillion. The stock has a trailing 12-month earnings per share (EPS) of $5.90, a price-to-earnings ratio (P/E) of 32.71, and a dividend yield of 0.52%. The stock has a beta of 1.29, which indicates that it is more volatile than the market.

The company has a trailing 12-month price-to-earnings ratio (P/E) of 32.08 and a forward P/E of 28.33. The company also has an enterprise value-to-sales ratio of 7.76 and an enterprise value-to-EBITDA ratio of 23.60. These ratios indicate that the company is highly valued given its size and profitability.

How Apple attains its excellence

Apple’s growth has been driven by strong demand for its products and services, especially the iPhone 12, which supports 5G networks and has boosted sales in China and other markets. Apple also benefits from its loyal customer base, its diversified revenue streams, its innovation capabilities, and its ecosystem of devices and software.

Apple is expected to launch new products and services in the second half of 2023. These products could further boost Apple’s sales and earnings, as well as its stock price and valuation.

Analysts Bullish on Apple Stock

Apple has a strong consensus rating of Strong Buy, supported by 24 buy ratings and 7 hold ratings, with no sell ratings. The average price target for Apple is $191.96, according to 31 Wall Street analysts’ 12-month forecasts issued in the past 3 months. 

Citi analyst Atif Malik recently initiated coverage of AAPL with a Buy rating and a price objective of $240, indicating a potential upside of 26.6% from the current levels. Malik is optimistic about Apple’s expanding gross margins, its ability to navigate through challenging macro conditions and inflation, and its success in gaining market share over Android competitors. The focus on selling premium models and designing cellular chips in-house is expected to improve margins. Wedbush analyst Daniel Ives also maintains a Buy rating on Apple with a price target of $220, suggesting a potential upside of 16%.

Challenges faced by Apple

However, Apple faces some challenges and risks, such as the global chip shortage, regulatory scrutiny, antitrust lawsuits, competition from rivals, and the potential slowdown in consumer spending. However, analysts and investors remain optimistic about Apple’s prospects, as the company has a track record of overcoming obstacles and delivering value to its shareholders.

Bottom line

Apple is the first company to reach a $3 trillion market capitalization as it continues to innovate and dominate the tech industry. Apple’s valuation is justified by its performance and potential, as well as by its loyal customers and investors.

BlackRock Echoes AI Driven Market Run, Warns of Mild Recession

The world’s largest asset manager believes the artificial intelligence-driven market run is real and here to stay. The sentiments come against the backdrop of AI-focused plays triggering one of the best-ever first of the year rally, with tech-heavy Nasdaq up by more than 30%. BlackRock has since reiterated its bullish call on semiconductor plays, developing chips that power the revolutionary technology and its innovations.

BlackRock AI Call

In a mid-year research report to investors, BlackRock’s research arm reiterated an overweight call on AI plays. It also emphasized that AI tools have the potential to unlock more value from the data gold mines that most companies are sitting on. The revolutionary technology has already shown it has what it takes to analyze huge chunks of data, making it easier for companies and people to make informed decisions based on the data sets.

BlackRock sentiments come amid growing concerns that the overall stock market gains are increasingly concentrated on a few companies. The fact that the rally is not spread out but focused on AI plays has been bone-on-bone contention among analysts and retail investors.

Nevertheless, if history is anything to go by, then gains in the stock market have always been concentrated on small cliques of plays. According to BlackRock, AI can be a big driver of returns over the years even when the mast environment is not good.

Recession Risk

On the other hand, BlackRock strategists have warned that the risk of a mild recession is still in play, which could be the reason behind the short-term downturn in developed nation equities. The Federal Reserve’s hiking interest rates to the highest level in years has triggered a significant spike in borrowing costs, something that’s making it difficult for people and individuals to access cheap capital. The result has been a slowdown in economic activities.

Nevertheless, the prospect of the economy plunging into recession is declining daily, going by the string of positive economic data. The labor market has remained resilient, with inflation levels declining significantly from four-decade highs. Investors positioning themselves for a credit crunch early in the year have been disappointed in missing out on the huge rally in the market.

The US economy has remained resilient despite the high-interest rate environment.  The banking crisis coming and going without having a ripple effect has all but helped quash concerns helping fuel a buying spree in the market.

BlackRock Outlook

Even though stock prices are not low enough, BlackRock has been building up positions amid expectations of a mild recession. The investment firm holds over 7% of the Nvidia stock, which has more than tripled in value in 2023 on receiving a boost from the AI-driven market rally.

With interest rates expected to remain at elevated levels in the race to try and push inflation levels higher, BlackRock favors being bullish on short-dated US bonds for income. The asset manager expects the FED to hike interest rates to highs of 5.75% and keep them at those levels until the second half of next year.

According to the asset manager, the central bank will keep policy tight for a long time to deal with the persistent inflationary pressures fueled by supply constraints and transition to a low-carbon economy.

AI Driven Gains To Continue As Stock Market Concentration Persists

The US equity market has been on a roll in 2023, with the S&P 500 up by more than 13% and the Nasdaq up by more than 30%, only six months into the year. Amid the impressive rally, the gains have mostly been fueled by a small cluster of stocks, much to many investors’ concerns. The off concern is that the rally has mainly been concentrated on stocks with exposure to artificial intelligence technology.

Stock Gains Concentration

The fact that the stock rally rests precariously on just a few companies has been the bone of contention over whether it is sustainable. According to six years of research by Hendrik Bessembinder, there is nothing to worry about as the trend will likely continue. According to the research report, the uneven stock market return is nothing new as it has been there over the years and is likely to continue.

The shareholder wealth enhancement report that looks at stock returns from 1926 to 2022 clearly indicates that gains have mainly been concentrated over a small clique of plays. Likewise, the report shows that the pool of superstar companies with exponential returns is slowly shrinking.

For instance, five stocks were responsible for 10% of the wealth expansion in 2016. The number shrunk to four in 2019 and is down to three today. The report is of interest to any investor who has been worried about the craze for artificial intelligence.

AI Plays To Drive Gains

Generative artificial intelligence plays have emerged as the craze of Wall Street. Nvidia, one of the companies producing GPUs that will help power AI technologies, has more than tripled in value, with its market value nearing the $1 trillion mark. Microsoft, Apple, and Google are other big players with a strong interest in revolutionary technology that have also registered significant gains helping propel the two indexes.

The tech giants have added over $4 trillion in market share attributed to the AI craze. The increase is 47% more than the combined worth of all players in the Russell 2000 index.

According to Bessembinder, treating the basic pattern of a few plays driving the broader market higher as unusual is a big mistake. A clear look at market returns over the past years and the key drivers clearly indicates that the situation is permanent and likely to intensify. Therefore, AI plays will likely continue pushing the market higher amid increased interest in them.

Rarely has the market rallied in the past without alarm bells being raised that only a small group of stocks was fueling it. In late 2010, FAANG stocks, which included Facebook, Apple, Amazon, Netflix, and Google, were the key drivers. Investors who shied away ended up missing out on an ample opportunity as the five stocks dominated total gains

Concentration mostly occurs because of the role of profits when it comes to picking stocks. Investors tend to bet big on companies that generate more earnings at any given time. Likewise, the more money that a company makes, the higher the valuation it tends to control on Wall Street

The effect of compounding has also had a significant impact on Wall Street gains being concentrated on a few set of companies. The fact that some companies build gains upon gains has made it impossible to avert concentrations in the stock market.

Retail Investors Bet Big on Palantir Despite Analysts Valuation Concerns

Palantir Stock is the center of a fierce tussle between retail investors and analysts on Wall Street. After coming under immense pressure over the past few years, the data analytics software giant has exploded in recent weeks amid its increased inroads around artificial intelligence. While retail investors have bought into the company’s prospects around the technology, analysts are still skeptical.

Palantir Growing Retail Investors’ Interest

Retail investors have been building positions around the stock on growing optimism that the company is attracting tremendous demand for AI-powered tools.  Palantir is number 10 among the top stocks purchased by retail investors, ranking way ahead of Microsoft and Netflix.

The stock is already up by more than 90% from its May low, affirming the intense buying pressure in the market. The fact that the stock is still down by about 60% from its 2021 highs is another catalyst fueling the buying spree as investors look to snap it at a discount.

The company’s Chief Executive Officer, Alex Karp, reiterating that the AI tools represent an infinite market has only strengthened the investors’ resolve to strengthen their positions. Expectations that the company’s revenues will rise by about 16% this year and grow by 35% by 2026 owing to AI initiative is also driving the buying spree.

The company’s commitment to being cash positive has also helped strengthen investor sentiments. While the stock is expected to be risky and volatile amid the increased focus and scrutiny of AI innovations, many retail investors remain optimistic.

Analysts Skepticism

In contrast, analysts and fund managers remain extremely skeptical, with the stock’s consensus recommendation at 2.41 out of five, the lowest among Russell 1000 software index players. The fact that nearly half of the analysts that track the stock have a sell rating signals a cloud of concern on Wall Street.

Palantir stock is also trading 29% above its average analyst price target, which is already fueling overvaluation concerns. With the shares trading at more than 60 times their estimated earnings, the price valuation is not going well with most strategists.

For starters, Nvidia, which delivered better-than-expected financial results driven by its innovation around AI, has multiple below 50. This is despite the chip giant tripling in value this year amid strong demand for its GPUs that continue to power the AI revolution.

The skepticism comes against the backdrop of many stocks rallying on the virtue of unveiling AI tools. In recent weeks, there have been concerns as to whether any solid underlying fundamentals back the rallies and whether they are sustainable.  While Palantir has a strong focus on AI technology, it is still early to conclude that the move will significantly bolster its prospects and bottom line.

According to analysts at Goldman Sachs, artificial intelligence is just an extension of Palantir’s existing work. The fact that the technology does not represent a significant change in product strategy or is expected to enhance adoption does not warrant the premium valuation that the company enjoys by virtue of touting its AI tools.

Given that the CBOE NDX Volatility Index is down by 34%, its March peak could explain why investors are open to taking up more risks with the gauge closing at 19.3 below its 10-year average of 21.4 signals growing demand for risky appetite in the markets.

How Big Companies Enjoyed Backstops on Billions as SVB Went Under Amid Bank Crisis

Federal Regulators have been touted for doing a good job in controlling the banking crisis by stepping in and guaranteeing all deposits above $250,000 as the Silicon Valley Bank went under. The move was deemed necessary at the time, seen as the only way to help protect American workers and small businesses.

FDIC SVIB Backstop

However, it has since emerged that the biggest beneficiaries were big companies with significant financial muscle that were not in danger. Sequoia, one of the largest venture capital firms, was one of the beneficiaries with its $1 billion in deposits with the lender covered by federal deposit insurance. The fact that the insurance company also protected Chinese heavyweight Kanzhun Ltd continues to rattle policymakers.

Silicon Valley Bank and its parent SVB Financial Group had a combined $4.6 billion in deposits. In the bankruptcy filing, the bank insisted that the $2 billion in deposits that the parent company had with the bank should be returned.

The revelations are part of a document mistakenly released by the Federal Deposit Insurance Corp that provides a glimpse of some of the biggest depositors at Silicon Valley Bank. At the time, Treasury Secretary Janet Yellen affirmed the government’s response to the banking crisis as necessary to avert a major catastrophe for the financial sector.

Nevertheless, backstopping at the time was deemed necessary to help protect American households with over $250,000 in deposits. Had the deposit not been backstopped, many people would have lost their homes or struggled to improve their standards of living on everything being wiped clean with SVIB going under.

On the other hand, critics are questioning the move to backstop all deposits, including that of foreign entities. Former Vice President Mike Pence was one of the biggest critics insisting that backstopping all depositors amounts to a bailout, something that the current administration has always pushed back against.

Raising FDIC Backstop Limit

Similarly, there is debate about whether there is a need to raise the insurance limit for businesses if the insurance policy is to work in protecting households. There are also calls to ensure that the backstop does not apply to foreign entities, especially Chinese companies.

After backstopping all the depositors, the FDIC was left with a bill of $15.8 billion. Consequently, it has already proposed taxing some of the biggest banks billions of dollars in fees to help replenish the bedrock insurance deposit. The extra fees are to be collected annually over eight periods to help mitigate any liquidity concerns.

Likewise, the collection of the fees would have a small hit on the income of the largest banks. Additionally, the push to collect the money could be halted if less money is needed at the end to replenish the FDIC.

The banking crisis has since cooled off after rattling the financial markets amid concerns that it would trigger a broader market crisis, as was the case in 2009. In the last financial crisis, banks were at the center, a move that resulted in heavyweights like the Lehman brothers going under as the Treasury Department pushed back on a bailout.