AI Stocks Dominate with the Debt Ceiling Finally Behind Us

Can we finally put the debt ceiling talk in the rearview mirror? We answer that question and talk AI in this week's Jarvis update. I'm your host, Brian Dress, Director of Research here at Left Brain, joined as always by our CEO and Chief Investment Officer and number one Miami Heat fan, Nolan Langford. Nolan, welcome to the program.

Thank you, Brian. Can't wait to get off the show and start tailgating for the Heat game. Game 1.

Well, hopefully when this, when this airs, it'll be a good result for you Miami Heat fans. As we get started here, we'd like to ask you to like and share the video. If you do find these videos useful, it helps other investors find it, and that certainly helps us too. And subscribe and hit the bell for notifications. That way you find out when each video is out, and we're out every other week with these. A quick preview for you. Markets are feeling positively buoyant this week. Two topics as we discuss the week's action. First, market divergence reaches extreme levels. And second, AI dominates the conversation. A couple of announcements before we get started with our main program. First of all, we have our new website up. It's leftbrainwm.com. We'll put the address down below for you. We're happy with it. We'd love to get everyone's feedback on it. But also sign up for our Jarvis newsletter where we cover some of the same topics we cover in today's video in greater depth. We were out last week with our May newsletter, and of course we'll be out late in June with the June newsletter. Of course, we produce this show for the everyday investor, whether you're— whether or not you currently work with an advisor. We'd love to be a resource for you. If you'd like a second opinion on how to position your portfolio for the market recovery, we'd love to talk. Give us a call on the number below. Also, if you're an institutional investor, we've got something for you as well, and that's our research service. Research subscribers get 6 to 8 of our brand new research reports each month, along with our library of hundreds of stock reports that we've been compiling since 2020. So check that out. We'd love to have you as a subscriber. Let's get started with the market recap. First of all, the S&P was up 1.68% this week. The tech-heavy Nasdaq was up over 3%. The small-cap-heavy Russell 2000 was up just 0.75%. Markets are performing quite well over the last month. We'll put the monthly chart up for you. You can see the NASDAQ was up a little over 7%, uh, but the S&P was up about 1%, but certainly some positive action. Nolan, the debt ceiling has really dominated the conversation, uh, for investors. On Wednesday, we saw the House of Representatives overwhelmingly pass a debt ceiling deal Now we're just waiting on the Senate. Just a bit of a formality, but I think it's all going to be handled now. What are your general impressions of what we've seen this week?

Well, I mean, we kind of knew it was inevitable, but I am breathing a sigh of relief. At least we can have this debt ceiling talk, government running out of money, possibly shutting down. Hopefully we can have that news story fade to the background so we can focus on what's really important, which are ways to make money going forward. Happy to see it.

So am I. We're getting a little bit bogged down with these macroeconomic details. We'd love to get back to talking about what's important, and that's making money in individual stocks. So let's jump right into our topics. Topic 1, we're calling Market Divergence is Getting Extreme. So we're going to put this chart up for you on the screen, uh, but the S&P 500 is up a little over 10% year to date, but the average stock, it's a little bit different underneath. The RSP, that's a, that's a measure of the average stock in the S&P 500 with an equal weighting. That's up just a fraction of a percent. So that tells us that the average stock is not quite up as much as the index. The Nasdaq 100, which is 100 of the biggest tech and growth stocks, is up more than 30% year to date. So we can conclude the top 7 or 10 stocks are sort of driving index return right now. How do you interpret that divergence?

So you're right, there's just a few leaders that's dragging the market up. But if the average investor looks at their portfolio, they're not going to see anything close to a 10% return, at least diversified portfolios will not. And especially for people who entered this year after last year's bludgeoning, entered this year thinking safety, thinking I'm going to buy Treasury bonds and I'm going to buy dividend stocks because I want to be safe. They have to be really disappointed looking at the red on their statement. It's an interesting side note that year to date, there's just one group which is considered— at least coming into this year was considered the riskiest group— is doing the best this year. And what was considered the safest group is doing the worst.

Well, let's talk about that, Nolan. How do we deal with that situation? What should investors do with the other 495 stocks in the S&P? So I think, you know, a lot of people own some of the stocks that are doing great. That's Meta, that's That's NVIDIA, that's Microsoft, a few of the other huge companies. Obviously they're holding other stocks in their portfolio and it's disappointing not to see your full portfolio doing as well as the index. You know, how should people deal with that situation? Should they be adding more to these tech stocks that are performing or should they stick to what their plan was in having a diversified and broad portfolio?

I think a bigger debate is probably the stock, bond, cash debate. I think the average investor, and we're not speaking to left-brain clients, 'cause we own individual stocks, and there's good reason to own individual stocks, but not very many investors do own individual stocks. They own mutual funds or broad-based ETFs. So a lot of these individual names that we talk about, if you're not a left-brain client, it's probably going to just fly over their head a little bit. They're just looking at their 401(k) statement or whatever statement from wherever they're with, and they're just looking at all these mutual funds and just looking at a return. And just thinking what's happening on a sort of a global basis. But underneath that, particularly if you own individual stocks or individual bonds, there you have an opportunity to set yourself up exceedingly well if you pick right for the next 2, 3, 4 years. And like we've been saying, we think this is probably the most exciting time to be an investor since the end of the global financial crisis, which started in 2008. You know, from 2008 to early 2022, after the global financial crisis, markets about tripled. And in this case, from after COVID to January of this year, there's some really good businesses that fell 50%, 60%, 70%, some cases 80% or 90%. Not all businesses are bad. So, on the way back up, you're going to have an opportunity, if you can pick well, to really, really do well, not only in stocks, but in bonds. And so I think it's an exciting time to be an investor, especially as the clouds start to part.

So, Nolan, we, we like some of these tech stocks that have done really well, but we're also looking for opportunities in other areas that have lagged in 2023. And that's the benefit of active management. And that's what we do here. With that, let's jump on to topic 2. So topic 2, artificial intelligence dominates the conversation. So again, if you read our Jarvis newsletter last week, we talked in depth about AI and kind of some of the opportunities we see. In that investment thesis that's beginning to play out. So definitely take a look at that if you want to see some of the individual names that we like. But if you're following any market coverage, you know that AI has really been the major story over the last few months and it seems to have come in like an avalanche. You know, even before 2023, certainly there was talk about AI, but now it seems like a deluge of discussion of AI in the investment world. We just finished with earnings season. It seemed like as we read a lot of the conference calls, companies that mentioned AI did absolutely astounding in terms of their earnings responses, and those companies that didn't, didn't do so well. How are you looking at AI from an investment point of view, Nolan? Is this a revolution that investors really need to take under consideration?

Yeah, they're not gonna have a choice. You know, it sort of reminded me of the Y2K thing when every new IPO put.com in their name and they all got a big boost in their valuations. And so they're not there with AI yet, the publicly traded companies. You're gonna hear a lot more focus on AI. If nothing else, it gets you more investor attention, i.e., a higher stock price. And I think from an investor standpoint, you're right. I don't know that the individual investor, if you own mutual funds, I don't know that there's a way that you can take advantage of artificial intelligence or any of the excitement that's gonna come afterward. At least not to the full extent. You're going to have to own individual securities. But like I mentioned earlier, I think for the average investor, the bigger decision is stocks, bonds, and cash. Hey, we came off 2022, which was just an awful year from a return standpoint. And I get the sense that a lot of investors are still fairly cautious. A lot of cash built up on the sidelines and accounts. And one of the things that got investors really excited this year was the fact that they could actually earn a return on their cash. So we've seen hundreds of billions flow into just interest-generating products. So CDs, high-yield money markets, people are jumping up and down, you can earn 3, 4, 5%. But I think the time has come for you to think about a long-term investment. Holding cash at 4% is not a long-term investment, nor is holding 10-year Treasury bonds at 3.5%. And just to remind investors and, and the viewers, historically, over long periods of time, the best place to invest is the stock market. It's not real estate, it's not gold, it's not cash, it's not CDs, and it's not bonds. It is individual stocks. And now the sun is shining again. We do have AI to thank for people realizing Hey, you can make money buying stocks of promising businesses. So I think it's game on. We're setting ourselves up for a terrific 2 or 3 year run here.

I agree. I'm looking forward to the IPO of Left Brain Artificial Intelligence coming up here soon. So, Nolan, how should investors be positioning for AI? Is it too late? How far into the thesis playing out are we at this point?

We were talking on our analyst call earlier, and I just mentioned all about the excitement that came from the internet. Really it came commercially viable in the '90s. And then you had all of these businesses that really did well because of the internet. It wasn't really the internet or investing in the internet that made investors money. It was companies like Amazon.com and Netflix and Facebook and all these other companies that built applications that they can distribute their products and services vis-à-vis the internet. And I think AI is going to be the exact same way. So now people are really excited about these language models ChatGPT is out, but really corporations or enterprises that are going to really make or generate the revenues from it, a lot of them haven't even developed a strategy yet. And so the analogy I use is if we're talking about a sports game and you're talking about a first inning, the game really hasn't been scheduled yet, let alone the fans haven't shown up. So it's very, very early right now. The companies that you're seeing that get a stock benefit is what we call the picks and shovels. Of AI. So the companies that are going to build the chips and the infrastructure to use AI, but the next level, which is the software and the applications, that's where the real big money is going to come. That's yet to be developed. So there's still a lot of time.

I agree with you, Nolan, and I think this is a kind of a minute-by-minute situation. There are going to be some brand new winners we don't even know about coming up in the next few years. It's going to take active management to determine the best places to invest in AI. That's what we specialize in, and that's what we're looking for every day here at Left Brain. We're going to close it out here. Any final thoughts for the viewers as we ended up this week?

Yeah, I have a couple. One is it is time for the viewers to get bullish. I know if you have cash on the sidelines, you have money in an old account, you're just kind of letting it sit, wait for things to settle down, I think it's time to get moving. I do think that there's money to be made both in the stock market and the bond market. I think we can sort of bid adieu to the interest rate increases and we can sort of forget about the recession talk. Let's not forget, stocks still do well because they look forward and stocks trade based off of their revenue and their earnings growth. And so there's still some money to be made there. So that would be my, my first thought. It's time for investors to get bullish and to put money to work. Give us a call. We'll be happy to chat with you. That's how we're positioning portfolios. And then my second thought is we're getting ready to go into this summer doldrums where we don't have any sports. And so this is our last hurrah with the NBA Finals. It's not only, you know, we have our Miami Heat that are going to be playing tonight, but the markets are also heating up. AI is getting people excited again. And so it's time for investors to get excited as well.

I like what you did there, Nolan. We're sharpening our pencils and looking for the best opportunities. You should be too. We'll see you again next time.