Nobody Sees This Stock Market Warning

[00:00:00] Speaker 1: this looks like a market crash on friday we saw nvidia get hit broadcom get hit amd micron meta tesla microsoft red right across the screen but here is the part that most investors are missing this is not a normal sell-off where everything is falling together the headline numbers look ugly but underneath the surface the market is telling a very different story because ultimately on a day where the s p 500 was down more than two percent 51 of the stocks in index were actually up that is the entire story today the market is not collapsing evenly and that makes this much harder because since 2023 sharp two percent down days have often been buying opportunities so is this another dip to buy or is this time different we can see that fear is rising but this is not full panic we're not extreme fear we're not at maximum capitulation so this is not a simple everyone is terrified moment and that is why ray diallo's warning matters he's not saying ai is fake he's saying something much more important a real technology boom can still become a stock market bubble and the real pressure that we saw in the exact stocks that have carried the market higher semiconductors ai infrastructure mega cap tech the highest expectation part of the market and it matters because the s p 500 is no longer equally driven by 500 companies a handful of giants now have a huge influence on the whole index so when those giants fall the index falls and that is why this breadth chart is so important more than half the market is positive but the index was still down hard it tells us the sell-off we saw was concentrated and that doesn't mean harmless if the concentration part is big enough it can still drag down the entire market that's ultimately the danger of index concentration so we need to understand dalio's warning because his point is not that the ai story is fake his point is that investors may be confusing a great technology with a great stock investment before we decide whether the sell-off is a buying opportunity we need to separate two things ai as a technology and ai stocks as investment those are not the same things because the technology can be real the demand can be real the companies can still be high quality but investors can still overpay and that is exactly the [00:02:26] Speaker 2: mistake that ray is warning about here technology changes um produce bubbles and the reason they produce bubbles is because nobody can get get it exactly right okay there um you have to either spend a ton of money to capture your market share and so on or um and you and don't worry about whether it's too much or not or you don't spend enough money and you lose your market share and it's very imprecise with a lot of competition okay and then when people uh bet on the technology which i'll bet on the technology but they think that buying the stocks is betting on the technologies which is a different thing because the stocks can be expensive and so on that's that's a problem that's the key point he's not saying ai is [00:03:17] Speaker 1: fake he's not saying nvidia microsoft meta amazon or broadcom are bad companies he's saying investors can be right about the tech and still wrong about the price and that's why the sell-off we saw matters the market is not questioning whether ai exists is questioning whether too much future growth has already been priced in and this is not just a us story global markets are reacting to the same ai concern south korea matters because its markets been heavily powered by the semiconductor and ai boom when a market moves this far this fast expectations become fragile investors start pricing in perfection and when perfection gets questioned the reversal can be sharp it tells us this is not just one us stock having a bad day it's the broader ai trade being tested globally and then add war tension on top of that now investors are not just dealing with valuation they're dealing with macro risk at the same time and when macro risk hits at the same time the biggest stocks are already priced for perfection the market can move fast and this is where his warning becomes more serious he's not just saying technology bubbles can happen he's saying today's market is moving closer to previous bubble like conditions and to be fair sentiment's not extreme greed this is not a market where every indicator is screaming mania but markets do need broad euphoria everywhere to become risky sometimes the bubble sits in the one area that matters most so what's the end is it a bubble that bursts eventually so i i i think [00:04:47] Speaker 2: it is yes and then that moment there's always the issue of a bubble and we can measure a bubble i have indicators and that there's how many people are over owned what's the sentiment a lot of indicators for bubble and we are right now rising close to closer to not at the same level in 2000 and same level in 1929 [00:05:09] Speaker 1: the important words are closer to not at he's not saying we're already in 1929 he's not saying the market must crash tomorrow but he is saying the direction of travel is becoming more dangerous and when the selling is concentrated in ai semiconductors and mega cap tech that matters because those stocks are now large enough to move the entire index so we may not have full market euphoria but we may have euphoria in one very important part of the market and that part is big enough to move everything else and the next clip we're going to highlight explains why the market action we saw on friday was so important because when a bubble starts to unwind investors do not always sell everything they sell what they can sell they sell the biggest winners they sell the most liquid stocks they sell the stocks everyone owns and ray describes this as the moment paper wealth needs to be converted into actual [00:05:58] Speaker 2: money about it is there's two parts to it there's quote a bubble and then there's the pricking of the bubble and the pricking of the bubble happens when there's a need for wealth to be sold to get the money like normally in a dynamic of a debt problem okay if you take japanese a bubble take the 29 bubble take the 2000 bubble all of them have an element of you know tightening money to to because it can't go on forever it'll find its bubble the question is how long you let the bubble go before there's the pricking so in order to do the market timing to know how to market time it requires both the understanding of the bubble and the looking for the pricking and the pricking is the converting of wealth into money [00:06:46] Speaker 1: that's why it was so strange when we saw more than half of the smp which can be up while the index still falls hard because if investors need cash they sell the names that are easiest to sell nvidia microsoft meta amazon broadcom tesla so the problem may be concentrated but because the concentration is so large it ends up becoming an index level problem but before we get too bearish we need the other side because not every two percent sell-off becomes a crash since 2023 a lot of these sharp down days have actually been buying opportunities and sentiment today while it's not showing extreme greed it's showing fear which matters because a market with fear hedges and cash can still climb higher and goldman is making the exact argument here we heard from the bloomberg [00:07:32] Speaker 3: technology folks yesterday a big conference lots of major players in the ai space saying demand is incredible they just the momentum how do we know though that it's not just kind of a major major fomo trade and that there's going to be some kind of reality or reckoning coming in the near future [00:07:48] Speaker 4: because from the institutional investor perspective we actually still see a lot of discipline out there there's still i think a wall of worry left to climb higher in this market what we look at is our prime brokerage data and one of the most important pieces out there right now i think is gross exposure so essentially hedge funds are still long a lot of their single stocks ai tech exposed names they're also more short macro products against these longs than they ever have been in the history of our data set what that tells me is there's still healthy skepticism about what is going to happen next i want to be i want to hold my lungs but i want to make sure i'm hedged and it's essentially the most hedged we've ever seen hedge fund clients at goldman sachs on the equity floor that is the bullish case [00:08:37] Speaker 1: this is not a market where everyone is unhedged euphoric and convinced stocks can only go up there is still worry there is still protection skepticism and that is why this dip can still get bought ray can be right the bubble risk is rising while goldman can still be right the specific sell-off may not be the start of a crash and that's the part that made friday difficult when we look at the red heat map it feels like something is breaking but if you look at recent market history dip buyers have been rewarded again and again goldman's view is simple unless earnings crack or jobs weaken or liquidity disappears this could still be a normal reset inside a bull market what does goldman also [00:09:15] Speaker 5: think is it a buying opportunity is it time to buy the dip i think that there have been few and far [00:09:21] Speaker 4: dips to buy uh so far this year um so yes when you have a two percent sell-off in the s p 500 it has paid to buy those dips and and i think it continue and i think that will continue i think today you have some profit taking into the weekend ahead of what is likely going to be continued supply uh as evidenced by the news that just broke but really we had a strong jobs print this morning and i would say what are the fears that people continue to list as top concerns it's inflation it's iran it's private credit and this morning's jobs print you know has moved has rates moving higher and people now think that we will get a rate hike and by year end so it is i think it's healthy i do think it's a buying opportunity um and i think that there is still a significant amount of worry cash on the sidelines short exposure out there for for the market to climb higher so that's the other side this could be [00:10:18] Speaker 1: profit taking healthy reset it could be another dip that eventually gets bought but the reason i'm not blindly buying everything is because the selling is concentrated at the most crowded part of the market so the conclusion's not panic but it's also not blind dip buying the conclusion is selectivity and this is where spacex enters the story because if the market has to absorb one of the biggest ipos ever that money has to come from somewhere this is called crowding out too many things are competing for the same pool of capital ai capex mega ipos private credit government deficits and eventually some investors may need to sell existing stocks to fund the next big thing yeah you say that for the first time this [00:10:59] Speaker 5: century we're entering a period of crowding out where capital becomes scarce and there is not enough risk capital to fund all projects uh how should we be thinking about that as it pertains to the markets [00:11:11] Speaker 6: right now yeah that's exactly what i see happening i see people um selling stocks in order to make room to buy the new hot sexy ipos that's dangerous that line matters because it explains the strange market action [00:11:25] Speaker 1: that we see if investors are selling existing stocks to make room for new ipos the selling does not need to hit everything it can be targeted it can hit the biggest most liquid winners and that is exactly what appears to be happening the market's not saying that every business is broken it may be saying investors are raising cash from the stocks that have worked the best which is why spacex matters even if you're not planning to buy the ipo a deal that large can still affect the rest of the market the other risk is forced buying is one thing to buy a stock because you think the valuation is attractive it's another thing to buy it because you feel you have no choice that's not valuation discipline that's career risk and charlie says this is exactly the kind of language that he's hearing now people say i have to buy [00:12:12] Speaker 6: this ipo because it's going to be such a big part of the of the index i have to own this stock because if i don't i'm going to underperform that's the kind of talk that has almost always led to trouble and it's frankly a lot worse today than it was even two or three months ago that's the warning i have [00:12:30] Speaker 1: to own it is very different from i want to own it at this valuation one is valuation discipline the other is career risk and in a market already dominated by a few huge names forced buying can make the upside feel unstoppable but you can also make the downside much more violent when everyone tries to rebalance at the same time so the issue is not only whether spacex is an amazing business the issue is whether the market can absorb it without pressure elsewhere and this clip explains the actual mechanics with spacex the debates not just valuation it's not just governance it's not just elon musk the biggest question is how the market funds a deal this large because look markets aren't magic if tens of billions of dollars need to be absorbed that money has to come from somewhere and that can create pressure in the nasdaq and the smb 500. well i think that's the really big deal i [00:13:19] Speaker 7: think everyone has views on valuation they have views on governance i think that's all already priced in the muskonomy for me the physics of this deal is the most interesting thing and how that 86 billion dollars on one day in june is funded and and i think that there are potential significant implications for the broader nasdaq and smp indices as as as as room is made for these new shares that phrase is perfect [00:13:48] Speaker 1: the physics of the deal if 86 billion needs to be funded that money has to come from somewhere and if investors sell existing stocks to fund that deal then even great companies can fall for liquidity reasons not fundamental reasons liquidity reasons it's why supply matters it's why timing matters and it's why this ipo could affect more than just spacex now layer on the bond market if yields rise expensive stocks become harder to justify and the stocks with the most future growth priced in are usually the most sensitive this is exactly why growth stocks can fall hard when rates move higher the valuation math changes future profits become less valuable today and then on top of that add oil rising after iran and israel traded strikes is another inflation risk it doesn't automatically create a crash but it removes some of the market's comfort where if geopolitical risk escalates oil can keep moving if oil keeps moving inflation expectations can rise if inflation expectations rise yields can rise that is why the market is watching any sign of a deal calm tensions and the pressure eases escalate tensions and the market has another problem so this is not just one thing it's not just ai it's not just spacex it's not just yields it's not just oil it's all of them hitting the market at the same time high yields pressure valuation especially the expensive growth names and those are exactly the stocks that we saw get hit on friday higher oil risk bring inflation back into focus that makes rate cuts harder and the market doesn't like that and dalio's warning is that this is how bubbles become vulnerable not when the technology falls but when the market is price perfection and then liquidity tightens and this chart is really the cleanest summary more than half the smp 500 was up but the index was still down that really highlights the concentration risk and when the concentrated risk is ai semiconductors and mega cap tech that's big enough to move the entire market so my conclusion isn't sell everything is not buy everything fears rising but this is not full panic it means opportunities can exist but we can't treat every single dip the same this is now ultimately a stock pickers market some dips are opportunities some are traps and treating every sell-off the same is a massive mistake and some two percent sell-offs become great buying opportunities others are warnings the only way to know the difference is to look stock by stock and that's exactly what i want to do today with a with a final ranking conclusion so now let's make this practical because if ray is right the biggest mistake investors can make is confusing a real technology story with a good price so i want to quickly go through nine stocks some look genuinely interesting after the sell-off some look okay but not amazing and one in my opinion is the perfect example of why valuation still matters and let's start with palantir because this is the cautionary example the stock is down around 24 year to date it was down around four percent on friday but even after the drop the valuation is still extremely demanding and it's interesting to note that we get a triple buy signal although quant very rare to see strong buy and palantir is also trading near its 52 week lows and with it being down double digit year today we can see wall street are very bullish they see 36 upside some as high as 255 but you can see the issue with the company straight away the forward p is sitting at 93 price to sales well when we take a look sitting at 42 on a forward basis and the valuation grading coming at a d this is exactly the type of stock that dalio was warning about and my dcf for palantir comes in at 134 with the market price pretty much sitting at the same region this tells us there's no margin of safety and more importantly when we look at the reverse dcf well it's asking for 25 growth that might happen for palantir but this means there's very little room for disappointment so my verdict on palantir is simple great story great growth possibly a great company but a zero percent margin of safety this is not the dip i'd be rushing to buy now compare that with meta that was down around six percent on friday is also down around 10 year today also trading towards 52 week lows where we get a strong buy from wall street a buy from seek alpha and a hold from quant for which analysts very very bullish they like this at least in the shorter term over the next year they're anticipating around 40 upside some analysts see meta over a thousand dollars within the next 12 months and the forward p sits around 18 times forward earnings versus a 5e of around 22 so it's not an ai stock trading at crazy bubble multiples it's actually trading below its own historical norm for which when we look at the blue tunnel highlighting the intrinsic fair value we do get that slight disconnect here against the bottom end indicating possible undervaluation and my dcf coming to 824 where the current price is today around 600 is indicating meta looks to be giving a 27 margin of safety and if we're to take a look or the reverse dcf it only needs around 5 growth that is the difference meta still has risk ai capix is huge the market's questioning how much money needs to be spent but if that spending eventually converts into earnings power meta still looks like one of the best mega cap ai risk rewards today next up we have uber and this one is interesting because it's not purely an ai bubble stock it's more of a profitable growth stock getting pulled into the broader risk off move it's down 13 year to date again another one like the previous two trending towards 52 week lows and also very similar in that both wall street and seeking alpha give this a buy rating wall street again like we've seen from the previous companies very bullish on these stocks for uber they see around 48 percent upside more bullish analysts at 150 some as low as 70 and the valuation grading sits at a b minus which is honestly much better than most growth names is trading around 21 times forward earnings and when you compare that to their five year you're actually looking at around a 35 discount and my dcf is really where uber becomes interesting fair value as we'll come to show you 130 at the lower end versus a market price of 70 indicates a margin of safety of 46 which is also the highest in the group now look it is still a growth stock it still needs execution but among the names on the list uber has one of the best combinations of growth valuation and upside with the market pretty much pricing in zero risk now we've used 8 10 and 12 as the low and medium and high case and some insist we can see triple digit upside but even the lower end which we believe 8 to be very reasonable most recent year at 42 is indicating some strong potential next up is intuit this is probably the most dramatic reset on the list the stock is down 55 year to date and that immediately gets attention whereas trading at new 52 week lows with a double very respectable buy rating from both seeking alpha and wall street and some huge upside in anticipation from wall street where they see this over the next year at 491 66 sums it as high as 921 interesting to note the low end isn't too far off where the share price sits so you can see sentiment does seem to be bottoming at least for intuit and that's clearly shown when we look at the forward p which has collapsed is trading 11 times forward earnings versus five year of 32 this is a huge reset for a business that's historically traded at a premium and you can also note the massive massive disconnect from where it sits today the bottom end of the blue tunnel which has actually been increasing in just the last few months after their latest earnings over the last five ten years this collapse has never been seen before and this is why we would put this in a severely undervaluation bucket now my dcf 495 price today below 300 indicates a large margin of safety of 40 percent and the reverse dcf well it's actually negative minus four percent means the mark is pricing in a very very low bar we've used four percent just look at the last five years compounded at 18 percent most recent year at 30. the risk is obvious growth disappointed the market is no longer wanting to pay a premium but if intrate can stabilize free cash flow and return to even modest growth this looks very interesting next up is adobe this is another hated software name and that is exactly why i'm interested the stock is down 28 year to date and the market is clearly worried about ai disruption again heading towards 52 week lows whilst we notice a double buy from both seek alpha and wall street for adobe it does look to be on the weaker side below four out of five and again like everyone that we've covered respectable upside wall street see just over 30 percent over the next year average price target 329 dollars and when you look at valuation well look forward pe on the non-gap basis sitting below 11 when you compare that to their five year of 27.6 that is a 61 percent discount this is very rare for a software name like adobe and my dcf 378 indicating a 34 margin of safety and again like we've seen in this sector another negative on the reverse dcf again the market is not pricing in much optimism but the risk is real ai disruption if ai destroys adobe's moat the stock deserves to be cheap but if adobe adapts this could be one of the better contrarian software opportunities and look we have used no growth in our own estimations just in the last five years it's climbed to nine percent next up is netflix and this one surprised me a bit the stock is down 12 year to date and the market still rates the business fairly well but valuation is the debate again near 52 week lows a very respectable buy from wall street 4.3 out of five and also respectable upside in their opinion just below 40 percent 115 dollar price target some as high as 151 now the rating for valuation it does it at a d minus forward p sitting just below 23 times forward earnings but that is below their five years so you are getting a 38 discount but we wouldn't call this obvious cheap value but the dcf does look better fair value coming at 118 against market price of 81 a 31 margin of safety so there is more upside here than i initially expected and when you take a look market price game nine percent it isn't as low as some that we've seen in fact negative it is fairly respectable but for netflix when you look at the last six years they've been climbing 36 31 in the most recent year it does look like something that's very achievable but my issue is that netflix has already executed incredibly well expectations are still not low so i like it but i don't like it as much as the likes of uber introit adobe or meta next up we have salesforce this one down around 30 percent year to date the chart still looks ugly but ugly charts are sometimes where the opportunity is again trading near 52 week lows where we get a very respectable buy from wall street as well as seeking alpha and very nice upside as well if you do believe wall street in their estimations 255 dollar price target 37 upside some as high as 475 and the forward p sitting at 13 times vesa five year close to 28 so the market's clearly no longer pricing salesforce like a premium software compounder and very similar to most that we've seen today there is quite a large disconnect between the bottom end of the fair price and where it sits today although this has been constant for over the last year for salesforce and my dcf 261 dollars against the price today we're talking a 29 margin of safety and the reverse dcf no surprises for guessing it is negative which tells you expectations are very low again we view zero percent most recent 16 percent growth to the free cash flow five years sitting at 28 the problem is confidence investors need to believe salesforce can keep growing keep improving margins and use buybacks well so i like it but i'd rank it slightly below both adobe and intuit next up we have visa this is not the highest upside name but probably one of the cleanest businesses on the list is only down around eight percent year to date so it's not a massive crash also trading towards 52 week lows with a strong buy from wall street and wall street estimate around 23 upside over the next year average target price just below 400 now the forward p sitting 23 times earning compared to five year it is below that of 27 so yes visa is cheaper than normal but not screaming cheap is usually the case with very high quality compounders and when we do look at the blue tunnel it is just slightly below so you could argue slight undervaluation where my dcf four hundred and fifteen dollars against the price today 322 margin of safety of 23 not huge but respectable for a business this high quality where the market is estimating eight and a half percent growth you can see we've used 12 percent the five year period has been 10 10 year 18 and most recent year at 15 so for me these are the safety option lower upside than uber intuit adobe or meta but cleaner more predictable and easier to hold through volatility finally we get avi this is the defensive name on the list it's not part of the ai trade it's not getting crushed like software and it was actually green on the day where analysts see the lowest of those that we've looked at so far in terms of upside 12 price target 254 dollars but again there is a range as low as 184 as high as 328 but valuation with this company is less exciting than those we've looked at yield sitting at three percent below the five year forward appear at 15 slightly above the five year so it's not obviously cheap and in fact when we take a look at the blue tunnel it's sitting in that reasonable signal although right there towards the upper end interesting to note that if you wanted this in an undervalued level you'd have to go to 2021 now my valuation model gives an intrinsic price 252 dollars indicating a 10 margin of safety so for me avi more of a defensive hold than a screaming buy if you want stability income and less exposure to ai volatility avi makes sense but if i'm looking for the best upside after a sell-off this is not near the top of my list so if i rank these purely by margin of safety the list would be uber at number one at 46 but i want to rank them purely by one metric just margin of safety i want to rank them by a mix of margin of safety business quality and how much confidence i have in the numbers at number nine i'd have palantir it might be a great company it might continue growing quickly but with basically no margin of safety this is exactly the kind of stock where dalio's warning applies being right about the technology is not the same about being right about the stock number eight i have avi good defensive business but only 10 margin of safety so it's not enough for me to get excited at number seven i have visa probably the safest business on the list but the upside is lower this is the quality compounder not the deep value opportunity at number six salesforce it looks cheap but the market needs more confidence in the growth story and execution still interesting just not my highest conviction at number five netflix the margin of safety is better than expected but the valuation still deserves some caution great business but not my favorite dip today at number four meta it's still my favorite mega cap ai risk reward because the stock is not priced like a bubble despite being directly exposed to ai at number three adobe this is the best contrarian software setup the valuation is extremely low versus history but the ai disruption risk is real and number two is intuit this is the biggest quality reset the market has completely repriced the stock but if growth stabilizes the upside looks very attractive and at number one i'd have uber it was the highest margin of safety in the group strong growth and it's not directly tied to the ai bubble trade so that was the list and if i had to narrow that down to the names i'd research first it would be uber intuit adobe meta these is the safer quality option netflix and salesforce are interesting but lower conviction avi is defensive and palantir is the one i'd be most careful chasing let me know your own thoughts in the comments below if you enjoyed today's episode smash that like button hit that subscribe and bell button don't forget to sign up to the free weekly article we dropped one just minutes ago most importantly have a great day we'll see you all on the next one