Flagship Pod 94: Gauging the Rally

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Now let's get into what we reviewed.

Here are the 4 key things we went over:

• Why inflation looks like it's actually sticking around and what it means for the market

• Where AI can actually act as a deflationary influence

• What's powering the latest crypto rally

• When we'll get more clarity about where interest rates are headed and our outlook for the rest of the year

And if you're too busy to listen to the entire recording, below we included a compact summary of what went down.

To get all the juicy details, just listen to the entire recording. And now, onto the summary👇

Overview:

After a tougher week full of downturns, the broader market rally is back on the table while specific names like Microstrategy finally start succumbing to short sellers. The main story of this rally is that an alpha-starved market let some companies run extremely hot on massively overinflated hopes. All we're seeing now is some isolated corrections for names that just need to come back to earth a little. 

But, the main question is: Can this market survive a period of higher interest rates for longer? 

Right now, the market is betting that there are enough firms operating with the right mix of efficiency to effectively 'carry' this rally until rates can decrease again.

We're seeing a fundamentally different meta develop here as the Street comes to terms with the possibility that the Fed has avoided a recession while simultaneously not being even close to lowering rates. 

There's still a lot of growth left in this economy as efficient operations and the deflationary pressure being applied by AI advancements at the very top help offset declines in consumer spending. 

So, let's examine the major forces shaping this rally ahead of the Fed's pivotal decision regarding interest rates this week. 

Is Inflation Really Sticking Around?

With the CPI staying stubbornly above 3% and the PPI printing way hotter than the Street expected, investors are worried that the Fed may actually have to raise rates sometime in 2024. Oil prices aren't helping matters here. 

However, markets rallied after the initial CPI print thanks to stickier facets of inflation, like food costs, substantially cooling off for the first time. The fundamentals of the CPI look really strong, it's just factors like housing that are keeping prices high.

A lot of analysts chalk housing inflation to be more due to how the CPI measures shelter costs. Housing prices within the CPI tend to lag significantly behind the wider market. Meanwhile, other analysts have pointed out that rent prices on a broader base have actually decreased in the past 3 months.

While that's great, declines in U.S. reserves and a potential rise in demand coming out of China might push energy prices higher -- which could just reignite other inflationary pressures.

So, the critical moment comes this week when we get a better sense of what the Fed intends to do re: inflation moving forward. The big hope here is that Jerome Powell will project confidence in the Fed's ability to lower rates in the near future.

This entire rally was initially predicated on the market's hope that the Federal Reserve would start cutting rates in March and be able to accomplish at least 2 more throughout the year. Now, the Street is barely holding onto hopes we'll get our first rate cut in June. 

With all that said, we're still seeing a lot of strength in this economy -- so how are firms able to still thrive in such a punishing fiscal environment? 

The Real AI Rally:

For us, this market really does still boil down to AI advancements, but not the ones that are being overhyped on Wall Street.

Nvidia is still running way too hot, and even winners of our 'deployed AI' strategy like Dell are far too oversubscribed for us to feel comfortable updating our price target until more data comes out. A lot of these names are getting overbought in hopes of future growth -- while others are getting appropriately rated thanks to results that have already happened.

The distinction here is that enterprises big enough to have the appropriate volume of data are going to generate genuine AI efficiencies first. The main example we have for this cohort is our recent update to our Uber strategy. 

Uber is winning the market right now because of the incredible volume of testing an optimization they're doing right now. Uber is testing and deploying tens of thousands of AI models that make tens of millions of predictions every second to optimize every algorithm on the platform. This is making it much cheaper for developers to improve the product and also making Uber's core driver-routing system far more efficient.

That efficiency saves Uber costs and makes the platform stickier. In the end, Uber saves money and their product becomes better able to generate revenue. 

Those efficiencies only came after years of models chipping away at millions of micro-improvements. The AI revolution at it's current stage is simply firms brute-forcing better operations with a tidal wave of computing power. 

If we can get to the next stage of this AI rally, where smaller businesses can drive similar efficiencies, then we'll see AI as a genuinely deflationary force that helps get rising prices under control. However, we could be on a very bumpy road to that moment.

Regardless, this is a very strange moment on the market where winners win big and everyone else gets heavily punished for being anything less than perfect.  

Wrapping this Up:

We're not calling the top of the rally just yet, but we are watching every earnings report very closely as we gear up for Q2.

We need to see a lot more confidence from a lot more firms before we'll relax from our more defensive stance here.

At the same time, the ongoing crypto rally has us very encouraged for a market that still hasn't lost any appetite for risk. However, we'll explore the dynamics of the crypto rally in a future post that goes into a lot more detail. 

We'll keep you posted as the market develops.