Mega cap tech is topping out and AI is a bubble (but this metal is primed to launch)

The dominance of mega-cap technology companies, and the fervour around artificial intelligence, are two thematics driving the positive returns we've seen this year from the S&P500. If not for them, the index would almost certainly be in negative territory this year. 

There's been plenty of commentary on this topic but one of the many research notes that regularly cross Livewire's desk caught my eye recently. That's because its author, US-based global macro asset manager Crescat Capital, is bearish on both these tech themes – and bullish on gold – the reasons for which are explained below. 

The peak is past

Crescat reckons the S&P 500 peaked at the beginning of 2022. Not just that, the asset manager believes it was one of the most overvalued market tops in history. The current yield curve inversion suggests as much. Developed by Crescat's Tavi Costa, it's correctly predicted all seven of the last near-term recessions over the last six decades, with no false positives to date. 

"The overall fundamental earnings and free-cash-flow growth fundamentals at the median for the top-10 mega-cap tech stocks, meanwhile, have dropped precipitously with many of these companies already in profits and free-cash-flow downturn," writes Crescat.

"That these companies were the former growth juggernauts of an unprecedented 14-year cycle is itself a signal of a forthcoming economic downturn."

The tech sector is notable for fuelling both bull markets and, unsurprisingly, bubbles. This year's price gains by mega-cap tech presage the latter.

"The counter-trend rally year-to-date in the mega-cap techs has been based on the hope of a soft landing as well as hype over advances in artificial intelligence. In our view, this is a massive head fake."

This has echoes of the dot com bust – when top-10 mega-cap tech leaders had a similar bear market rally. 

"These were the companies that built the infrastructure for the Internet, but they were way ahead of themselves on similar hype and hope. Their stock prices were decimated in the naturally ensuing recession in 2001 which was also forecasted independently by this yield curve model," writes Crescat.

AI is inflating the bubble

Artificial intelligence seems to be getting ahead of itself, in both a practical and investment sense. 

"AI is indeed exciting today, just like the Internet was then, but as our chart also shows, the top-ten mega-cap tech stock prices are even more inflated in size today relative to the economy than their 2000-era analogs," says Crescat.

"Like their counterparts that built the Internet, today’s tech mega caps are the ones that have built the infrastructure for AI, including the cloud, neural network training software, and GPUs."

Crestone notes that the companies with staying power do their work after, not during, phases of market hysteria. 

"Google (NASDAQ: GOOGL) and Facebook (NASDAQ: META) were two disruptive Internet growth businesses that took advantage of the incumbents’ infrastructure to build massive entirely new technology growth businesses and take share from them. These companies did not even emerge until well after the dot-com bust. Similarly, Amazon (NASDAQ: AMZN) became one of the biggest growth disruptors of the Internet era, but not before its stock price went down about 95% from its 1999 peak into 2001."

A new cycle for gold is about to tee off

Crescat believes the stage is set for a third great gold cycle, based on a "robust with a combination of factors that worked in both the 1970s and 2000s long-term upward trending markets."

The list of factors supporting Crescat's thesis is long, but some of the standouts include:

• inflation, 
• high global debt, 
• fiscal deficits 
• constrained supply, and 
• asset imbalances.

"We believe gold is poised to break out to new all-time highs as it now competes with Treasuries as the ultimate haven asset for the current macro environment," says Crescat.