The money to AI stocks is a problem, and how it can be fixed
We do not have enough money coming into this market. The funds flow only to stocks tied to the data center buildout and a few others. Even the most tangential of the data center “stories,” such as the warehouse REITs and machinery stocks like Cummins and Dover, manage to sustain themselves if they have healthy data center orders — and not much else. Whereas the aerospace sector fell apart on expectations of a long war in Iran, the action in the sector’s defense names ( RTX , GE Aerospace , Honeywell ) has been horrendous. That’s a sign there isn’t enough money coming in to cushion a blow of an uncertain future, even as the present remains strong. The most disconcerting part of this market is the obliteration of health care, especially pharma. Just as anything peripherally involved with the data center is blessed, anything even tangentially associated with pharma is a nightmare. When I had Thermo Fisher CEO Marc Casper on “Mad Money” last week, I was stunned to see how much the stock fell despite his confidence and the medical tools and equipment maker’s strong quarterly numbers. They were met with savagery. Danaher is a similar story. This life sciences company has been a pure disaster for ages, so a renewed quarterly nightmare has now become the norm. It’s almost as if the company expects poor results and is grateful for them. At least Thermo Fisher comes out and defends itself. Danaher hides, though I am not sure what from, given that management seems so accepting of mediocrity. The old Danaher would reshuffle the deck or have something non-health-care to balance the sellers’ power. Not anymore. But it might not matter right now. Consider the case of Abbott Labs . I know this sounds unusual with the stock deeply mired in the low $90s, but the medical device maker is a darned good company. Yet the free fall is so palpable I can see why people, even at these lower prices, might want to avoid it. What’s to keep Abbott from falling to the $80s if health care is eschewed? The same goes with Cardinal Health . I admit this Club stock has been a disaster, but I am happy we haven’t bought it for gobs of points, which should allow us to get a decent average basis when we see the quarter on Thursday. This kind of decline usually foreshadows a truly suboptimal set of results, but I bet this drug and medical supply distributor actually beats the quarterly estimates. There is nothing wrong with Cardinal that more money coming into the market wouldn’t cure. The most daunting stock in my book is Johnson & Johnson . Here’s a stock that ran to the $200s on some excellent numbers. It then delivered a second set of equally good numbers , and it meant nothing; the stock has fallen about 5% since. The problem now, of all things, is the chart, which is so ugly that it calls into question the whole dynamic breakout and makes a move back to $180 the most likely next stomping ground. This would be an unthinkable decline in any other market. But in this one, where the fundamentals can’t be distinguished, and 19 times earnings seems the same as 16 times earnings, it seems to happen. Think about the astonishing nature of an indistinct price-to-earnings ratio on one of the most distinct companies on Earth in J & J, with a triple-A balance sheet, 18 potential blockbuster drugs, and a stripping of the prosaic low-multiple orthopedic division. But this action feels, however unlikely, that there could be a repeal of a major move that seemed permanent. This is doomsday thinking, but it is keeping an average down in my pocket until there is more evidence that my premise in this piece is wrong. Now it is easy to just stop at a flow-of-funds analysis. Simple to be glib. But we have to ponder how this could be the case? There’s no doubt that the market has spotted the Fourth Industrial Revolution. As a disciple of Nvidia CEO Jensen Huang, and a happy one at that, I find this logic on point. Why not stick to stocks at the center of the AI boom, like Intel , Arm , AMD , Corning , and Qnity ? Why stray from Texas Instruments and Lam Research ? Amazon and Alphabet represent data center conglomerates. If you don’t own these, you simply aren’t a believer. Notice I did not include Nvidia? That’s because Nvidia isn’t a choice. It is a perquisite. Tangentially, it seems odd to have a perquisite so stalled until last Friday. But sometimes this grizzled trader recognizes miserable trading when he sees it. There have been massive sellers exiting the stock. I am talking about several sellers who no doubt owned far more than 10 million shares. These sellers just lived in the $90s, but had the bulk of their shares for sale at the $200 level. When a stock goes from $200 to $208 in a heartbeat on no news, that’s a sign the sellers have been cleaned up. What you need to realize is that the proceeds from those sold shares are either sidelined or go back into some other vein of the data center heart, perhaps distribution, connectivity, or the Mac Daddy of the group, GE Vernova , which builds machines that convert natural gas into electricity. It also builds and supports nuclear reactors as a source of electricity for the AI build. There are only a few other nuclear plays, and most of them are chimerical. You need to know how rare this cordoned-off infusion of money really is. It just doesn’t stray. If it leaves the group, it seems to go to cash. There is no net underneath. Normally, I wouldn’t be as perturbed about this isolation of capital if it weren’t for what’s waiting in the wings: the initial public offerings of SpaceX, OpenAI, and Anthropic. The first, SpaceX, will no doubt be such a powerful magnet that it will draw money out of the S & P 500 to buy it. Nvidia will certainly suffer from both investors selling its stock as well as from the S & P 500 outflows. The overpay for SpaceX will be so gigantic as to warrant an investigation into how the IPO process works. My hope is that Anthropic and OpenAI are delayed either because of OpenAI’s weird ownership structure —a nonprofit controlling a for-profit company — or because Anthropic seems to have no shortage of money. We need this to happen for the market to continue its advance. If these two are sidelined, we can look through SpaceX. Otherwise, it will lead to a market cul-de-sac, but still no reshuffling of the deck. Can the market really bear the concentration? Yes, if there are not many new companies entering the market. But it does feel remarkably like the period of January 1999 to April of 2000, when the only thing worth investing in was the internet, and companies like Johnson & Johnson and Bristol Myers saw their P/Es shrink in a very similar fashion. That April switch from the internet back to health-care stocks was caused not by the bond market, the usual culprit, but by the IPO market, when bankers pumped out more than 300 worthless offerings. Supply killed that bull. So, as long as we don’t have too many IPOs coming and only SpaceX launches of the big three, we could make it through this period without anything seismic happening. But there is one make-or-break moment coming up: Wednesday, when Alphabet, Amazon, Meta, and Microsoft report (Apple is on Thursday). Only Nvidia has a greater impact on the market than these megacaps. If we get through next week with even two of these names being rewarding, then Fourth Industrial Revolution investing will stay in vogue for the duration. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
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