Jim Bianco: There Are Now Two Stock Markets

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**Jim Bianco** (1:03)
If you look at AI, and let me just say it up front, I believe AI is the biggest technology innovation that we have ever seen. And that includes the Internet, that includes the PC.
You could go back maybe to the railroads in the 19th century and the innovation that they had. And yes, it was massive, the innovation that the railroads had transformed the country.
And so, given that, if you look at the AI and AI-related stocks, the MAG-7, the semiconductors, the equipment manufacturers, some of the pure plays and energy that feed AI, that is, as of a couple of days ago, last time I looked at it, it's about 41 stocks. And that's a specific number because I got it from Michael Kemblis at JP Morgan. That's 45 percent of the S&P 500, it's 41 stocks. It was 49 percent at its peak in early June.
The other 459 stocks are 55 percent of the S&P 500 So it's like the AI stocks are almost the same size as everything that's not AI in the S&P 500 Now, if you look at the correlation, our indexes of S&P without AI, only AI, if you look at the correlations of those stocks, it's falling and it's below zero. So a good example of this would be Monday. Monday, the market was down a lot and people, you could look at the argument that the S&P was down and you go to the Wall Street Journal of Bloomberg and it will say, market's down and people are worried about the state of the economy. The 459 non-AI stocks were up almost 1% on Monday. So what's that tell you about the economy? That everything that's not associated with a data center or a chip is actually having a good point. So it's almost like it's become two different stock markets right now. And they're not even correlating with each other. In the past, like a year or two ago, I could have said they're two different stock markets and you could have said, yeah, but they both go up together and they both go down together. And that was largely true a couple of years ago. That's not even true anymore right now.

**Maggie Lake** (3:15)
So if they're two markets and they're diverging and on different paths, which one do you want to be exposed to?

**Jim Bianco** (3:21)
That depends on your risk tolerance. You know, if you want to go with the market that has the higher expected return, that is, you know, that you could potentially make more money off of it. You want to be in AI stocks, but you might lose half your money before you get there, or you might lose a third of your money before you get there. The AI stocks are probably down 15% now from the June high.
If you want a more predictable, can sleep at night kind of life, you probably want to be in the non-AI stocks, and I might add the non-AI stocks have outperformed the AI stocks year to date. But over the year, you've had a much bigger gain in AI stocks along the way. So it all depends on your risk preference, which way you want to go with it.

**Maggie Lake** (4:09)
Does it feel like we're setting up for a big correction led by that AI complex? When we hear all the time the concerns about, did we build too much AI infrastructure?
Can these companies get a return on that investment? Are you concerned about something like that being some kind of systemic event or does that, does it just spark a continued rotation into other parts of the economy or other parts of the market, like small caps, that might accrue the benefit of all that AI build?