AI "Locomotive" to Stock Market, Institutional "Catch-Up Trade" Adds Fuel

SPEAKER_1 (0:00)

Welcome back to Morning Trade Live. It is now time for The Big Picture, so let's welcome in Nate Peterson, Director of Derivatives Analysis, Schwab Center for Financial Research. Good morning, Nate. We've got some records for the S&P, the NASDAQ, NVIDIA at an all-time high today. Brett looks supportive. Tell us what you're thinking this morning.

Nathan Peterson (0:16)

Yeah, good morning, Sam. You know, it goes back to, you know, obviously we know the AI theme is powering, it's the locomotive.

If you go back a couple weeks ago, Sam, we talked about AMD raising prices, the Sox broke out technically above its 50-day SMA.

Then you get AMD also hit a fresh all-time high. That's like a technically leading indicator, the Sox being a leading indicator. NVIDIA follows all-time high, Taiwan semi all-time high. And then you've got the, you know, S&P now, market cap weighted that is making fresh highs. And if you're short, you know, it's an unspoken rule, but you got to cover. If your thesis is wrong, if the S&P has been within 76 to 7800 in this sideways channel, and it's going to resolve one way or the other, well, it looks like it's resolving to the upside here. You just kind of have to cover. And then if you're a fund manager who's been cautious on the sidelines or has a high percentage of cash, there's that tendency to have performance chasing. And so it really is this AI dominant theme. We know that it's earnings and it looks like this, you know, estimates are not only firm, but they've actually been creeping higher. And, you know, there is a lot of tail risk out there. We could talk about the yields. We could talk about the iron war, oil prices, the AI disruption, that, you know, any of that stuff could happen. But until it really begins to hit the consumer, or until we get signs that this AI economics is not what we thought it was, then the market is just going to respect the dominance of the greatest, largest capex binge in history, the greatest technical renaissance, you know, displacement that has ever happened. And what is, when the S&P is making new highs here, who is that good for? The top half of the consumer. So it kind of reinforces that theme as well. So, Sam, there's just, you got to respect the trend, you got to respect these technical kind of breakouts here.

SPEAKER_1 (2:22)

Absolutely, and you've got to appreciate that, as you mentioned, I mean, stocks have continued to rally to these records through a hot war, through yields being elevated, through a lot of the AI growth scares, if you will, with slow down talks. You've continued to see, as we mentioned, the Mag 7 getting its mojo back, and video at all time high, AMD as well. It is interesting that semis are lagging tech today.

Do we know what that's about, or is this just rotation into what has been working lately?

Nathan Peterson (2:56)

Yeah, so it's real simple, if you think about it, in the sense that semis led, this was all the price increases, AMD breaks out to a new high, et cetera. So that leads, and then when you break out to a new high like this, what happens is that you get fund managers, investors, traders who say, okay, what hasn't moved? And then they begin to look for that relative alpha, if you will, the catch up trade, because if it looks like technically things are intact, I want to go grab the underperformers. Now look, I'm looking, I understand, the Russell doesn't look great today. The price action is not great.

S&P equal weight is not that great, but within tech, it's the relative outperformers there. Look at software, IGV, 11 a month high. Look at Microsoft, 11 month high. Let's go back to the middle of the summer when Microsoft and Alphabet and Amazon reported AI acceleration in terms of their cloud services growth. We have that to look potentially, look forward to here in a couple of weeks, but that's like an encouraging indicator to see acceleration on Azure and AWS, etc. So within tech, we'll just keep within tech, that where's that relative alpha? What is not performing? So software could be one of those.

We've seen SpaceX break out to the highest level since June, for example. So there's a lot going on in terms of that money. They're just looking for a place to find alpha and grow.

SPEAKER_1 (4:25)

Yeah. And you mentioned, it really just comes down to the consumer. I mean, if we start to see cracks there, but as I mentioned to Jake Dollarhide in the previous segment, I mean, I was looking at these charts this morning of companies like Home Depot, Lowe's, Mickey D's, Pepsi. I mean, Pepsi had a bad day yesterday going into earnings this week. You look at your Walmart. I mean, yes, Jake says that obviously Walmart's had an OK year, but these are all down for weeks on end now. Is that telling us anything about the consumer or are we going to get a lift, you suspect, from these Q3 earnings once again?