Podcast Summary: The Compound and Friends – "Stay Bullish on America With Nick Colas, Everyone’s Building AI Chips, Ringing the Bell"

Release Date: December 18, 2024

Introduction

In this episode of The Compound and Friends, host Josh Brown engages in an insightful discussion with Nick Colas from DataTrack Research, alongside co-host Michael Batnik. The conversation delves deep into the dynamics of the U.S. stock market, the evolving landscape of AI chip manufacturing, and the broader implications for investors heading into 2025. Packed with data analysis, market trends, and strategic insights, this episode provides listeners with a comprehensive understanding of the current economic climate and future investment opportunities.

Year-End Stock Market Review

Timestamp: 00:00 - 03:58

Josh Brown opens the episode by highlighting the extensive coverage planned for the show, emphasizing the wealth of information and insights to be shared. Despite Jessica being under the weather, Brown and Colas are prepared to tackle a range of topics from U.S. versus international market performance to detailed analyses of various sectors.

Key Points:

• Reflection on the unexpected events of 2024 and their impact on the market.
• Anticipation of 2025 being a pivotal year with lasting implications for investors.

Notable Quote:

• Josh Brown [03:58]: "I think 2025, while it's a quote unquote normal year in the market for a lot of reasons, it's a year to remember forever."

Impact of 10-Year Yields on the Stock Market

Timestamp: 04:00 - 09:39

A significant portion of the discussion revolves around the relationship between 10-year Treasury yields and stock market performance. Colas presents a detailed chart analyzing quarterly stock returns against fluctuating yields, revealing intriguing patterns in how different segments of the market react to interest rate changes.

Key Points:

• Rising rates typically indicate economic growth but can negatively impact stock valuations.
• U.S. large-cap stocks (S&P 500) have consistently performed well across all quarters, regardless of rate movements.
• International markets (Rest of World) are more sensitive to rate changes, often underperforming when U.S. rates are high or uncertain.
• The U.S. has outperformed global markets over the past decade, capturing a larger share of global equity.

Notable Quotes:

• Nick Colas [05:05]: "Rest of world might be an okay trade. Otherwise, you gotta be super careful because they're not going to work anywhere near as well as US Large caps."
• Josh Brown [08:00]: "Small caps, rest of world and small caps are more correlated than rest of world and large caps."

U.S. Dominance in Global Equity Markets

Timestamp: 09:45 - 19:09

Colas elaborates on the sustained dominance of U.S. equities over the past ten years, attributing this trend to both market performance and the strategic decisions of investors. The U.S. market has absorbed a significant portion of global capital, leaving other regions in relative decline.

Key Points:

• The U.S. has gained 14 percentage points in global market share over the last decade.
• Almost all other countries (excluding China and Taiwan) have lost market share to the U.S.
• Top-performing U.S. sectors have consistently outpaced their international counterparts in 1-year, 5-year, and 10-year returns.
• The cultural and systemic advantages of U.S. businesses, including a strong shareholder focus, better management of assets, and higher ROE (Return on Equity), contribute to superior performance.

Notable Quotes:

• Nick Colas [17:49]: "The single most important thing is the dollar's reserve currency status, because it allows..."
• Josh Brown [17:57]: "My perspective, I agree on the deficit point, but I think there's a mentality where in America, it doesn't feel as though there are any limits."

The Nvidia Dominance and Emerging Competition

Timestamp: 20:20 - 43:48

A deep dive into the semiconductor industry, particularly focusing on Nvidia's stronghold in AI chip manufacturing and the rising competition from companies like Broadcom and AMD. Colas argues that while Nvidia remains a leader, the landscape is becoming increasingly competitive as major enterprise customers develop their own AI chips.

Key Points:

• Nvidia's dominance in AI chips is being challenged as enterprise customers and hyperscalers like Google and Amazon build their own customized chips.
• Broadcom has emerged as a significant competitor, leveraging longstanding relationships and strategic acquisitions to position itself as a key player in the AI chip market.
• AMD is also gaining traction by providing ready-to-deploy chips, despite recent stock underperformance.
• The sustainability of Nvidia's valuation is questioned as competition intensifies, potentially leading to multiple contractions despite earnings growth.

Notable Quotes:

• Nick Colas [22:21]: "Financials are now the second largest sector in the S and P at 13% trailing only tech, which is 33%."
• Josh Brown [53:49]: "The stock is fine. It's up 162% year to date. The thing is, those gains were front end loaded this year."

Nasdaq Performance Compared to the Dot-Com Bubble

Timestamp: 26:29 - 35:35

Colas addresses comparisons between the current Nasdaq trajectory and the historic dot-com bubble, clarifying that the two scenarios differ significantly in terms of price returns and market behavior.

Key Points:

• Current Nasdaq performance is measured and not resembling the explosive growth of the 1995-2000 dot-com era.
• Despite reaching new highs, the Nasdaq's return profile lacks the extreme volatility and unsustainable growth patterns of the past.
• Factors such as Bitcoin integration and evolving tech sector dynamics distinguish the current market from previous bubbles.

Notable Quotes:

• Nick Colas [32:27]: "You hear people saying this is the 90s, but this feels nothing like it."
• Josh Brown [35:35]: "It hasn't had a 12-month rolling double, which would indicate a bubble, and we're nowhere near that."

Market Breadth and Active Management Concerns

Timestamp: 43:48 - 81:30

The conversation shifts to market breadth indicators, the behavior of active managers, and the implications of window dressing and tax-related selling on stock performance. Brown and Batnik discuss the challenges faced by actively managed funds in reflecting true market sentiment and internal dynamics.

Key Points:

• Evidence of window dressing as active managers offload underperforming stocks to appear more robust in portfolios.
• The concentration of performance in top sectors and major stocks like Apple and Broadcom raises concerns about market breadth and sustainability.
• Selling pressure on weaker sectors during year-end can distort market signals, potentially masking underlying weaknesses.
• Active management practices may contribute to short-term distortions without altering long-term fundamentals.

Notable Quotes:

• Josh Brown [77:29]: "This is window dressing. It's a very human thing and there's nothing wrong with it."
• Michael Batnik [83:19]: "You can't have a conversation with JC about insider buying or fundamentals. He does it just to piss people off."

Concluding Insights and Takeaways

Timestamp: 81:30 - End

In the final segments, Brown and Batnik summarize their insights, emphasizing the strength and resilience of U.S. sectors, the evolving competitive landscape in AI chip manufacturing, and the critical importance of monitoring market internals and sector performance as indicators for future investment strategies.

Key Points:

• U.S. sectors, particularly financials and tech, have shown robust performance, offering a compelling investment thesis.
• The semiconductor industry's competitive dynamics suggest a potential shift in market leadership and valuation considerations.
• Investors should focus on market internals, such as the proportion of stocks above moving averages and sector-specific performance, to gauge market health.
• Year-end behaviors like window dressing may temporarily skew market indicators, but underlying fundamentals remain crucial for long-term investment decisions.

Notable Quotes:

• Josh Brown [85:07]: "I think this is going to become a new theme on Wall Street. Alright, what's another way to play AI?"
• Michael Batnik [90:11]: "What you're starting to see is the hyperscalers building their own versions of that."

Final Thoughts

This episode of The Compound and Friends provides a thorough examination of the current U.S. market dynamics, the shifting semiconductor landscape, and strategic considerations for investors. By highlighting the sustained outperformance of U.S. sectors, the increasing competition in AI chip manufacturing, and the nuanced behaviors of active managers, Brown and Colas equip listeners with the knowledge to navigate the complexities of the evolving financial landscape as they approach 2025.

Notable Resources:

• DataTrack Research: For more in-depth analysis and daily market insights, visit datatrackresearch.com or follow Nick Colas and Jessica Rabe on YouTube at YouTube.com@nickcolis and YouTube.com@jessicarabe.

Disclaimers: All opinions expressed by Josh Brown, Michael Batnik, Nick Colas, and their castmates are solely their own and do not reflect the opinions of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for making investment decisions.