A rebound in chipmakers buoyed Wall Street as dip buyers emerged despite solid economic readings that reinforced speculation the Federal Reserve will boost rates in December.Max Kettner, Chief Multi-Asset Strategist at HSBC, discusses the AI trade and why it's following market narratives and not market fundamentals.
Yeah, I've been quite surprised to be honest about the uh rip that we had, the almost 250 point swing that we had on on Wednesday from the Asia session up until the US session and the sort of retro fitting of the narrative why the blue sweep isn't really that bad and why we've all, you know, why we've all expected it and it's the midterms being the the risk clearing event. We've been pretty skeptical about that to be honest. So Wednesday was was quite puzzling to us. Yesterday, equally puzzling, but of course, we're probably more in in liquidation mode, full on liquidation mode right now in terms of fast money accounts. Um, but overall the price action, particularly on the semis, it kind of does make sense because, yeah, like for us, it's never been about risk clearing. The risk or the event clearing is about AI capex. It's the entropic IPO in the next two weeks. Is it going to come? Is it not going to come?
Right.
It's about the Middle East, not really about the the midterms.
Okay, but is there contagion? I love Max, I love your phrase fast money accounts. Mere mortals aren't in fast money. We're like just trying to get to Whirlpool.
Retirement at age 90?
Something like that. Max, is there a contagion risk of all this folly over to people more cautious, more slow money?
I don't think so because, you know, we've had a lot of damage already. So when you look at, you know, the charts around how many stocks in the S&P or in the Nasdaq are now away from all-time high have declined since the start of the year or have had multiple compression. You know, we've we've shown those charts in the last few weeks multiple times that actually your PE compression since the start of the year or even only since May, since you really the rebound after the Middle East war broke out, after that rebound ended, you know, we've had an awful lot of multiple compression both in tech stocks and in US equities. Look at look at tech, look at S&P tech. We're now cheaper in S&P tech than the overall market. It's trading at a discount.
Yeah.
So, you know, I think the contagion, you could have argued that maybe three more or four months ago that that's a risk. I think we've derated so much now already that in order to order in order to talk contagion, but I'm not sure. I'd rather actually look at the other side of the coin. Look at things like staples. Staples now traded over 24 times earnings and tech trades at what, almost 16. That doesn't make sense. We know that doesn't make sense.
Well, and and here's here's something
like a Costco going up almost 25% in the last couple of weeks. A Walmart, a target, like come on, in a world of tariffs, in a world of higher energy prices to say, hey, I think the safe haven is buying the stuff that's exposed to the lower end of the K. That doesn't make sense. It's a it's a point of timing now when we unwind that.
Okay. Paul Sweeney with a fast money headline. There it is, Paul. I mean, it's the ultimate fast money headline this morning.
Yeah. Yeah, Max was just calling out the Anthropic trend uh IPO. Invest Bloomberg uh red headline here, Bloomberg's reporting. Investor said to discuss Anthropic IPO value at 1.2 to 1.3 trillion. Yes, that's a big number, but it is below what they had initially hoped to get something closer to $2 trillion dollars. So maybe the volatility in the marketplace is being reflected in this valuation here. Max, has from your perspective, have you materially changed or your shop materially changed its view of AI and as an investing theme and if so, how?
Not really. I mean, you know the the interesting thing is, if you looked at the chip prices over the last three months, look at for example P300, one of the oldest Nvidia chips, the rental yield has gone parabolically higher in the last three months. And that's the funny thing, right? That you know, fundamentally in the last three months actually, the outlook for chips probably has become better unless you say, oh, in 2028 and in 2029, the the picture is going to change upside down and they're not going to make any money anymore. But actually in the last three months, they've become more profitable. Rental yields have gone up, not down. So if you had told me three months ago, this is what rental yields, this is what the chips outlook is going to be, trust me, my trade would not have been, oh yeah, dump semis. Absolutely not. So the fundamental outlook, I don't think really has changed. But that having said that, is that the environment where we trade fundamentals? No. Like just go a month ago, a month ago, we didn't talk about AI, we didn't talk about tech or things. We talked about fiscal deficits. We talked about too much government debt and fiscal sustainability and how the 10 year maybe has to sell off to 6%. Who still talks about that? It's been a month ago and a month ago the narrative was only fiscal, fiscal, fiscal. No one cares anymore.
Okay. Okay. Let me get out front of your weekend note. We're down 6.25% non-futures on the standard of poor 500. You say you need to see more before you reaffirm a bull market. What do you need to see? Do you need to see further catharsis?
Yeah, Tom. I think for us, it's really the sentiment and positioning side that we've been flagging in the last few weeks that there isn't yet a contrarian buy signal that in fact, some of even our contrarian sell signals are still flagging. You know, at the bare minimum, that needs to go. At the bare minimum, we want a full-on neutral sentiment and perhaps a couple of buy signals triggering. This is certainly the stuff that we look at right now from a from a broader positioning perspective. Obviously yesterday with no longer it just being a rotation out of tech, but really a broad-based flush out, that has led to the VIX sell off and VIX inversion and all these sorts of things. So that's the first first kind of thing where we're looking at and I'm like, okay, this is this is good in the sense of capitulation. And the other one from an event risk, again, it wasn't the midterms. The event risk near term for the year end is the entropic IPO. It's around the Middle East. So we've got to wait until, you know, it's it's as good as anyone's guess what's going to happen with with the Middle East and we've got to look at what's happening with the Anthropic IPO. Is it coming? Is it going to be delayed? Is it going to be canceled? That I think in the next really two weeks, that's probably going to be the the actual risk clearing event for us.
I'll get one more in here.
If you were advising, uh, Anthropic Max, would you say, hey, come to market, the demand's still there, we're not price sensitive, we just need to get exposure here? Or would you say, hey, let's wait to this AI kind of uncertainty plays out.
No, I mean, like I I I definitely would. You know what, John? I I definitely would. I I would say come to market, but actually make it a reasonable valuation. Don't try to squeeze it out because the worst that could happen to you is that you're saying, right, we're going to squeeze the lemon as much as we can in terms of the valuation and primary and then we're going to listen secondary and actually the stock dumps 20, 30% on day one. I think the better thing from a particularly from a sentiment perspective is come out in a more reasonable valuation and then you realize the first couple of days, oh, look, stock is up in second in the secondary market. So that means sentiment around AI, demand around AI is still there. and that actually then, I think would be, again, that would be the sort of clearing event for the entire tech sector, I think.
Yeah.
