Critical information for the U.S. trading day
Another Friday and still the S&P 500 (SPX) struggles to break decisively above the 4,200 level. Debt-ceiling angst is battling with AI euphoria to leave the Wall Street barometer in the doldrums — bobbing near the top of a channel it has held all year.
‘Neutral’ is thus the apposite new rating for U.S equities from Citi. But, still, that’s an upgrade. The bank cites mild recession expectations already baked in; weak investor sentiment; and a tendency for a final rate hike to be followed by stock market strength, as reasons for the rating bump.
And AI, of course.
“While price moves for AI-related stocks have clearly been extreme, especially at a time when monetized use cases are still in the future, and with barriers to entry not overly high, we would still expect that it is too early to fade the moves before AI has even developed far enough to be able to disappoint expectations,” says the Citi global asset allocation team led by Alex Saunders.
Some commentators already are wary: “We are probably seeing a bubble in the making in the AI related stocks. Although no one questions the potential of AI, the valuations seem to have gone ahead of themselves and it could soon be time for correction,” says Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
However, there are many investors yet to boost their exposure, suggesting not only plenty of firepower on the sidelines, but that the sector has not reached the total FOMO phase that usually characterizes bubbles.
For example, Cathie Wood’s flagship ARK Investment sold its Nvidia (NVDA) stake in January, and it has not benefited from the recent AI-induced surge in big tech.
And, crucially, retail investors have yet to dive in, too, according to Vanda Research. The craze, as Vanda describes the current AI infatuation, “seems to have only sparked a marginal increase in retail buys, at least for now. Indeed, overlaying news mentions versus retail flows into AI-linked stocks and ETF shows that individual traders are thinking twice before jumping into some of these names.”
Source Vanda Research
Vanda’s analysis of trade flows shows that despite the media buzz, the AI mania is relatively muted compared to the meme stock bubble.
“Take, for example, the two most-popular stocks during the meme bubble, (GME) and (AMC), and compare them to two AI juggernauts, NVDA and AMD. The former duo attracted more retail flows during the two meme stock peaks of 2021 than the latter, despite having combined market caps of barely US$2 billion vs. NVDA and AMD’s combined market cap of US$430 billion at the end of December,” Vanda notes.
Source: Vanda Research
“The only GME-like stock currently attracting most retail capital is C3.ai (AI). But…retail traders have refrained from chasing this name aggressively, in yet another sign of overall cautiousness,” Vanda adds.
Still, if retail investors do look to run with the AI theme, then Vanda warns that recent trading suggests the cohort will continue to lose interest in banks and crypto-linked stocks.
“Should AI stocks’ outperformance extend further, we anticipate retail traders will start chasing other names beyond NVDA and (AMD) more aggressively (e.g., (AMZN), (MSFT), (GOOG), (TSLA)), further reducing the demand for crypto names.”
U.S. equity-index futures (YM00) (ES00) (NQ00) are mixed as Treasury yields (BX:TMUBMUSD02Y) (BX:TMUBMUSD10Y) (BX:TMUBMUSD30Y) nudge lower. The dollar index (DXY) is softer, while oil (CL.1) climbs and gold (GC00) advances.
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Reports abound that a debt ceiling deal is taking shape. Just as well. Goldman Sachs reckons that U.S. Treasury funds will be exhausted by June 9, potentially prompting a technical default.
Marvell Technology’s stock (MRVL) is powering nearly 16% higher in Friday’s premarket action after the chip company said it expected revenue from artificial intelligence to at least double this fiscal year.
Workday shares (WDAY) are jumping nearly 9% and headed toward their highest in more than a year after the software company easily topped earnings expectations.
Shares of Ulta Beauty (ULTA) are sliding 8% in the premarket after the beauty-products and salon chain said prices are starting to fall.
There’s a big batch of economic data hitting the screens on Friday. Probably most important is the personal consumption expenditure (PCE) index, released at 8:30 a.m. Eastern, which is among the Federal Reserve’s favored inflation indicators.
Durable goods orders, personal income and spending, the U.S. trade balance in goods, retail and wholesale inventories, all for April, will also arrive at 8:30 a.m.. The final reading of May consumer sentiment will be published at 10 a.m..
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It’s all a bit embarrassing. As debt ceiling negotiations dragged on, this chart from mid-week shows the market suggesting that short-term unsecured interbank lending was more secure than lending to the U.S. government. “The spread between the 1-month USD LIBOR and the 1-month T-Bill yield, which never went below zero during the 2011 debt ceiling crisis, and only for a total of 6 days during a similar episode in 2013, turned negative in the beginning of May and has plumbed ever lower lows, reaching -41 basis points as of yesterday.” wrote Benedek Vörös, director, Index Investment Strategy at S&P Dow Jones Indices.
Source: S&P Dow Jones Indices
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