🎙️ Back-to-Back

There’s no doubt about the biggest markets event on the calendar this week: Nvidia earnings, which come out Wednesday after the close.

The big question for investors: Will Nvidia’s earnings reignite the AI trade?

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Investors bet on a market melt-up?

• The AI breakthroughs that could change the world

This, and more, in just 5 minutes to read.

Chart of the Day

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In The News

🐂 Why Investors Are Betting on a Market Melt-up

Newton’s First Law found that an object in motion stays in motion. U.S. investors are betting on just that for the stock market.

We’re amid quite the rally as investor optimism remains high and fund inflows stay strong. Before the election, markets had already been on track for a good year. Then expectations of lower taxes and fewer regulations triggered another rally this month, while risky market behavior (high options trading, meme coins) has also become much more prevalent lately.

Consider:

• $56 billion: Inflows into U.S. equity funds (second-largest weekly haul since 2008)
  

• 49.8%: Investors bullish on the market (highest level recently)
  

• 40%: Investors more optimistic due to U.S. election
  

• S&P 500: Trading at 22x expected earnings (above 5-year average of 20x)
  

• Bitcoin: Hit $93,000 last week
  

• Trading in the over-the-counter (OTC) market, which includes riskier securities such as penny stocks, has jumped 27% in November from the same time last year

• Dogecoin: $55 billion market cap (now larger than Ford Motor)

The S&P 500 and the Nasdaq Composite sit within 3% of their respective record highs. With only a few weeks left in 2024, the S&P 500 is on track to clock a rise of more than 20% this year, the second consecutive year of gains of that magnitude.

That kind of back-to-back jump has only happened three other times in the past century, including most recently during the late 1990s tech boom. The other instances were 1954-55 and 1935-36.

Why it matters:

The current market valuation presents a somewhat complex picture. Some say it’s overvalued, citing the multiple many stocks are trading at. One chief investment officer told The Wall Street Journal that the market is “awfully expensive to have a melt-up.” 

• Simultaneously, bond yields are climbing, with the 10-year Treasury yield on the rise, hinting at potential inflation in 2025. One Bank of America analyst told clients Friday in a memo that sentiment is “dangerously bullish.”

Animal spirits: Less-optimistic investors also point to the surge in meme stocks and coins like Dogecoin — a cryptocurrency with no intrinsic backing — that has more than doubled since the election.  Those extreme market movements reflect what an analyst describes as "animal spirits" driving all the enthusiasm.

Warranted euphoria? But others are very, very confident in this rally, anticipating beneficial economic policies, lower tax rates, and reduced regulatory constraints. "I am bullish on the market. The euphoria everyone is feeling is warranted,” one chief investment officer and Nvidia, Tesla and MicroStrategy shareholder observed. 

We’ll leave the final words to the legendary economist John Maynard Keynes, who famously said: “Markets can remain irrational longer than you can remain solvent.”

Read more

More Headlines

📈 Elon Musk's companies are soaring in value

💻 Palantir jumped to a record after announcing a move to the Nasdaq

😎 Bob Iger is the most confident man in Corporate America

🤯 MicroStrategy’s $30 billion bitcoin cache is larger than IBM, Nike cash holdings as Michael Saylor loads up on another $4.6 billion in bitcoin

🛍️ Retail sales jump as consumers keep spending ahead of the holiday season

🤖 The AI Breakthroughs That Could Change the World

Chatbots, step aside. Transformer technology—the underlying engine of ChatGPT—is poised to revolutionize multiple industries far beyond conversational chatbots.

The Wall Street Journal’s Christopher Mims revealed this week how transformer algorithms, introduced by Google researchers in 2017, can understand and generate complex data across domains. The algorithms can now decode intricate patterns in everything from language translation to protein sequencing, essentially teaching computers to comprehend contextual relationships in unprecedented ways.

A few examples:

1. EvolutionaryScale uses AI to design entirely novel protein molecules—including one that mimics a jellyfish's bioluminescence but with a molecular sequence never before seen in nature. It could create bacteria capable of digesting plastic or developing personalized cancer treatments.
   

2. In robotics, companies like Physical Intelligence are developing universal AI systems that can control robots across various tasks. Their most impressive demonstration? A robotic system that can independently fold laundry, which requires flexibility and adaptability previously thought nearly impossible for machines.
   

3. The self-driving car industry also stands to benefit. Companies like Waymo use transformer models to give autonomous vehicles a more nuanced, contextual understanding of road environments. One example showed an AI system learning to identify and yield to unexpected objects like a dog crossing the street.
   

4. AI therapists could soon be mainstream — machines that help alleviate suicidal thoughts for patients who are more comfortable speaking to a machine than a person because they won’t feel judged.

Why it matters:

To be sure, many of these kinds of AI systems are helpers, not replacements. They still need training and human oversight. No matter how powerful they become — or, perhaps more accurately, because of how powerful they may become — they will likely always need human oversight. 

• AI research scientists note that we’re still in the early stages of major breakthroughs. And while the transformer breakthrough has been cited in over 140,000 scientific papers and helped make Nvidia the world's most valuable company, human creativity and intervention remain integral. 

Final thoughts: Forget the extreme views on the power of AI. AI is here to stay, and perhaps it’s not a dystopian threat but a powerful collaborative tool to reshape how we approach complex challenges in medicine, robotics, transportation, and beyond. 

“I want to make sure I set expectations,” says one AI CEO. “As proud as we are of our accomplishment, we are still at the beginning.”

Read more

Quick Poll

On Friday, we asked: Do you closely track 13F filings to see what changes large-scale professional investors make to their portfolios?

— About one-quarter of investors who responded said they closely track 13F filings, while one-third “sometimes” track them.

— “It's a good source of ideas to then run through my own filter,” one investor wrote. “Reviewing some of the more successful large fundamentals is fascinating, trying to work out the logic, etc, but I use HedgeFollow to track pro-investor moves in stocks I own or am interested in.”

See you next time!

That's it for today on We Study Markets!

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