Search

2023: The Year That Proved Everyone Wrong (So Far)

Tech to the Moon, Recession Taking Longer to Materialize
4521d748-f1e7-4893-8aa8-a3198b2efe8c_936x521-1

2023: The Year That Proved Everyone Wrong (So Far)

Tech to the Moon, Recession Taking Longer to Materialize

Hi Everyone đź‘‹,

Welcome to the 583 subscribers who have joined this week. If you’re reading this but haven’t subscribed, join our community of 269,209+ smart, fun & edgy investors👇

*This is sponsored advertising content and the disclaimer at the bottom of this email MUST be read carefully.

Who had the Nasdaq 100 up 26% in H1 on their 2023 scorecard? No one.Many projected a weak H1 and a recovery in H2. The opposite occurred in the first half.Hedge funds have also found themselves underperforming, with YTD returns of 5.58% ending April vs the S&P's 8.6% gain.When investors realized there is an alternative to earning 0.01% in a savings account, capital fled to money market funds yielding ~5%.This wasn't the only stampede of funds though. Money has piled into Tech stocks as the new defensives, riding the AI hype train.Famous money managers are proclaiming AI is "better than the internet," and when asked how to play the theme, the default is the Megacaps.We've had a massive run in Tech – but for how long? Will the winners continue to win or is it time to jump ship?

This week, in <5 minutes, we’ll cover the YTD Tech Stocks Run Up:

  • Setting the Table 👉 Gangbuster 2020 + 2021, Hangover of 2022

  • Catalyst #1 👉 Q1 2023 Earnings

  • Catalyst #2 👉 Artificial Intelligence

  • Relative Valuation 👉 Getting Back to Froth

Let’s get started!

1. Setting the Table 👉 Gangbuster 2020 + 2021, Hangover of 2022

The tale of the tape that drove Tech stock performance post-GFC, was monetary policy and liquidity. With interest rates near zero, capital flooded into growth equities. There were no alternatives.

Covid added fuel to the fire. By injecting more money into the system, Tech stocks moved higher post the Covid-bottom, and a massive rally took place into the end of 2021.

Between March 2020 – December 2021, it wasn’t uncommon to hear things like: “Even though this Tech stock trades at 72x EV/Revenue, the growth rate is higher than the revenue multiple, so it can grow into its valuation.”The eventual liquidity-tightening that hit 2022 hard, had something else to say about that. The hangover that followed for Tech names felt as bad as waking up as a 35 year old after partying like you’re 20 the night before. As inflation spiked and proved to not be “transitory”, the Fed responded with one of the most aggressive hiking campaigns in history. We all know how that went…

Just like how easing worked one way, it also worked the other.

This is why 2023 is so interesting though. Despite tight monetary policy, Tech stocks are putting up the middle finger to JPOW and rocketing to the upside.

*This is sponsored advertising content and the disclaimer at the bottom of this email MUST be read carefully.

2. Catalyst #1 👉 Q1 2023 Earnings

The most recent earnings season can be summed up in three words from every sell-side analyst report: "Better than feared".Have you ever heard of "under promise, over-deliver"? That's what these names did. In Q3 and Q4 of 2022, we saw a big reset in Tech companies adjusting growth forecasts downward. Going into earnings, most of the growth deceleration looked priced in.What does "priced in" even mean though? If earnings growth is slowing, and fundamentals are deteriorating, shouldn’t stocks go down? Not so fast. Since growth forecast adjustments were already in, and rates were moving higher, Tech stocks had headwinds into earnings. This earnings season became a matter of clearing a much lower bar – and that happened.Tech has gotten good at shifting from "move fast and break things" to "grow slower and fix things (like profitability)". As Tech continues to lay off workers, earnings are maintained and in some cases improved, despite lower growth.In a higher rate environment, you want less duration (i.e., pull cash flows forward), and Megacap Tech is managing their duration risk well. They have a lot of operating leverage.

Check out what’s happening with Nvidia.

Nvidia was experiencing massive YoY growth in the quarters ending 2022 and beginning 2023, but was expected to contract in the coming quarters. There’s some funky stuff going on here with the pull-forward demand from the pandemic and comps overhang, but the reality is that revenue growth is sharply decelerating.Oh look, the stock is up 113% YTD. That makes sense right?

This leads to my next point. New information and new narratives drive short-term performance. Not fundamentals like growth rates.

3. Catalyst #2 👉 Artificial Intelligence

AI has entered the hype cycle and rightfully so. It’s upending lots of business models, and investors are trying to find ways to get a piece. The default names to play in the space so far are Microsoft (OpenAI), Nvidia, Google, Amazon, and Meta. There are other direct plays on the infrastructure, like Snowflake, MongoDB, and Crowdstrike.As I'll make my case in the monthly newsletter, AI is not the "new new thing". It is the "new permanent thing" that many believe will have productivity enhancements similar to the invention of the internet.When big fund managers start paying attention – so should you. They dictate the flow of funds around the edges, which drives price performance.Speaking at the Sohn conference, Stan Druckenmiller highlighted, "AI is very, very real and could be every bit as impactful as the internet." He plowed $220M into Nvidia and $210M into Microsoft.Another big money manager, Steve Cohen, says that focusing too much on a looming recession could make you miss out on the "big wave" of AI opportunities.The billionaire added he's worried about the "types of jobs that will be displaced," but expects profit margins to improve. Weaker employment might finally make the Fed chill out and with higher margins, markets could rip. As stated by Cohen, "I'm actually pretty bullish."Here's a fun stat. Without the AI-related boom in Tech, the S&P 500 would be meaningfully down vs the rally we've had. Check out this widely circulated chart:

Image

I’ll be releasing this month's paid newsletter to my subscribers with a deep-dive on the state of AI that you don't want to miss!

4. Relative Valuation 👉 Getting Back to Froth

Another highly circulated chart this week was the relative performance of Tech vs. everything else.

We're now back to levels from the peak Tech run in 2021, right in line with the dotcom bubble. That comparison scares people.Let's remember the most infamous words in finance are "this time is different." and while the business models are certainly different, and cloud infrastructure will be more enduring than website URLs, things are starting to look frothy.It might be time to fade the rally.

Wrapping Up…

Previous tech market-ups have all been fueled by eras of low interest rates, liquidity and nothing else to put capital in. This time around, it’s a different story. We continue to have tightening and a recession on the horizon, yet the "AI" and "safety" narratives dominate.

We're through April 2022 levels despite this challenging backdrop. While I don't believe this rally is sustainable, I also don't believe it’s smart to bet against momentum.

Until next time. Always Yours. Incessantly Chasing ROI,

-Genevieve Roch-Decter, CFA

P.S. Have you checked our ALTS and CRYPTO newsletters? Subscribe for free!

Disclaimer: The publisher does not guarantee the accuracy or completeness of the information provided in this page. All statements and expressions herein are the sole opinion of the author or paid advertiser.
Grit Capital Corporation is a publisher of financial information, not an investment advisor. We do not provide personalized or individualized investment advice or information that is tailored to the needs of any particular recipient.
THE INFORMATION CONTAINED ON THIS WEBSITE IS NOT AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE, AND DOES NOT PURPORT TO BE AND DOES NOT EXPRESS ANY OPINION AS TO THE PRICE AT WHICH THE SECURITIES OF ANY COMPANY MAY TRADE AT ANY TIME. THE INFORMATION AND OPINIONS PROVIDED HEREIN SHOULD NOT BE TAKEN AS SPECIFIC ADVICE ON THE MERITS OF ANY INVESTMENT DECISION. INVESTORS SHOULD MAKE THEIR OWN INVESTIGATION AND DECISIONS REGARDING THE PROSPECTS OF ANY COMPANY DISCUSSED HEREIN BASED ON SUCH INVESTORS’ OWN REVIEW OF PUBLICLY AVAILABLE INFORMATION AND SHOULD NOT RELY ON THE INFORMATION CONTAINED HEREIN.
No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.
Any projections, market outlooks or estimates herein are forward looking statements and are inherently unreliable. They are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur. Other events that were not taken into account may occur and may significantly affect the returns or performance of the securities discussed herein. The information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and the publisher undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional material.
The publisher, its affiliates, and clients of the a publisher or its affiliates may currently have long or short positions in the securities of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities). To the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions.
Neither the publisher nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein.
By using the Site or any affiliated social media account, you are indicating your consent and agreement to this disclaimer and our terms of use. Unauthorized reproduction of this newsletter or its contents by photocopy, facsimile or any other means is illegal and punishable by law.
For Full Terms of Use Click HERE. For the Privacy Policy Click HERE.
Gritcapital.substack.com (“Grit”) is a website owned and operated by Substack. Grit is paid fees by the companies that make investment offerings on this website. Be aware that payment of these fees may put Grit in a conflict of interest with the investor. By accessing this website or any page thereof, you agree to be bound by the Terms of Use and Privacy Policy, in effect at the time you access this website or any page thereof. The Terms of Use and Privacy Policy may be amended from time to time. Nothing on this website shall constitute an offer to sell, or a solicitation of an offer to buy or subscribe for, any securities to any person in any jurisdiction where such an offer or solicitation is against the law or to anyone to whom it is unlawful to make such offer or solicitation. Grit is not an underwriter, broker-dealer, Title III crowdfunding portal or a valuation service and does not engage in any activities requiring any such registration. Grit does not provide advice on investments or structure transactions. Offerings made under Regulation A under the U.S. Securities Act of 1933, as amended (the "Securities Act") are available to U.S. investors who are “accredited investors” as defined by Rule 501 of Regulation D under the Securities Act well as non-accredited investors, who are subject to certain investment limitations as set forth in Regulation A under the Securities Act. In order to invest in Regulation A offerings, investors may be asked to fill out a certification and provide necessary documentation as proof of your income and/or net worth to verify that you are qualified to invest in offerings posted on this website. All securities listed on this site are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. Grit does not verify the adequacy, accuracy or completeness of any information. Neither Grit nor any of its officers, directors, agents and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy, valuations of securities or completeness of any information on this site or the use of information on this site. Neither Grit nor any of its directors, officers, employees, representatives, affiliates or agents shall have any liability whatsoever arising from any error or incompleteness of fact, or lack of care in the preparation of, any of the materials posted on this website. Investing in securities, especially those issued by start-up companies, involves substantial risk. investors should be able to bear the loss of their entire investment and should make their own determination of whether or not to make any investment based on their own independent evaluation and analysis.

Conversation

No comments

Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments

Disclaimer:The publisher does not guarantee the accuracy or completeness of the information provided in this page.  All statements and expressions herein are the sole opinion of the author or paid advertiser.

Grit Capital Corporation is a publisher of financial information, not an investment advisor.  We do not provide personalized or individualized investment advice or information that is tailored to the needs of any particular recipient.  

THE INFORMATION CONTAINED ON THIS WEBSITE IS NOT AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE, AND DOES NOT PURPORT TO BE AND DOES NOT EXPRESS ANY OPINION AS TO THE PRICE AT WHICH THE SECURITIES OF ANY COMPANY MAY TRADE AT ANY TIME.  THE INFORMATION AND OPINIONS PROVIDED HEREIN SHOULD NOT BE TAKEN AS SPECIFIC ADVICE ON THE MERITS OF ANY INVESTMENT DECISION.  INVESTORS SHOULD MAKE THEIR OWN INVESTIGATION AND DECISIONS REGARDING THE PROSPECTS OF ANY COMPANY DISCUSSED HEREIN BASED ON SUCH INVESTORS’ OWN REVIEW OF PUBLICLY AVAILABLE INFORMATION AND SHOULD NOT RELY ON THE INFORMATION CONTAINED HEREIN.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.  

Any projections, market outlooks or estimates herein are forward looking statements and are inherently unreliable.  They are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.  Other events that were not taken into account may occur and may significantly affect the returns or performance of the securities discussed herein.  The information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and the publisher undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional material.

The publisher, its affiliates, and clients of the a publisher or its affiliates may currently have long or short positions in the securities of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities).  To the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions.

Neither the publisher nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein.

By using the Site or any affiliated social media account, you are indicating your consent and agreement to this disclaimer and our terms of use. Unauthorized reproduction of this newsletter or its contents by photocopy, facsimile or any other means is illegal and punishable by law.

For Full Terms of Use Click HERE. For the Privacy Policy Click HERE.

Gritcapital.substack.com (“Grit”) is a website owned and operated by Substack. Grit is paid fees by the companies that make investment offerings on this website. Be aware that payment of these fees may put Grit in a conflict of interest with the investor. By accessing this website or any page thereof, you agree to be bound by the Terms of Use and Privacy Policy, in effect at the time you access this website or any page thereof. The Terms of Use and Privacy Policy may be amended from time to time. Nothing on this website shall constitute an offer to sell, or a solicitation of an offer to buy or subscribe for, any securities to any person in any jurisdiction where such an offer or solicitation is against the law or to anyone to whom it is unlawful to make such offer or solicitation. Grit is not an underwriter, broker-dealer, Title III crowdfunding portal or a valuation service and does not engage in any activities requiring any such registration. Grit does not provide advice on investments or structure transactions. Offerings made under Regulation A under the U.S. Securities Act of 1933, as amended (the “Securities Act”) are available to U.S. investors who are “accredited investors” as defined by Rule 501 of Regulation D under the Securities Act well as non-accredited investors, who are subject to certain investment limitations as set forth in Regulation A under the Securities Act. In order to invest in Regulation A offerings, investors may be asked to fill out a certification and provide necessary documentation as proof of your income and/or net worth to verify that you are qualified to invest in offerings posted on this website. All securities listed on this site are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. Grit does not verify the adequacy, accuracy or completeness of any information. Neither Grit nor any of its officers, directors, agents and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy, valuations of securities or completeness of any information on this site or the use of information on this site. Neither Grit nor any of its directors, officers, employees, representatives, affiliates or agents shall have any liability whatsoever arising from any error or incompleteness of fact, or lack of care in the preparation of, any of the materials posted on this website. Investing in securities, especially those issued by start-up companies, involves substantial risk. investors should be able to bear the loss of their entire investment and should make their own determination of whether or not to make any investment based on their own independent evaluation and analysis.