Is the only way really down for stocks?

{"text":[[{"start":5.6,"text":"My dear wife doesn’t half enjoy eclipsing me. During lockdown I thought I’d achieved a lot by growing a beard. Rebecca gave birth twice while completing an MBA at London Business School."}],[{"start":17.299999999999997,"text":"She took the Oreo last Monday, though. A first stab at some PR for her less-than-a-year-old jewellery firm resulted in a necklace on Beyoncé’s daughter at the Met Gala. Not bad, I mumbled. But haven’t you peaked a bit early?"}],[{"start":30.749999999999996,"text":"My fear was confirmed when a presenter at the Bafta Awards wore another one of her pieces this week. If this downward trend keeps up, the old lady who compères the bingo in Bognor Regis will soon be draped in diamonds. Joking, darling!"}],[{"start":46.89999999999999,"text":"There are plenty of investors who believe the only direction is lower for stocks, however. Michael Burry of The Big Short fame reckons we’re in dotcom bubble territory, breathing that “rare air, so extreme that the consequences will be unavoidable, no matter where one hides”. Global fund managers have cut their overweight positions in equities by two-thirds since March, according to Bank of America."}],[{"start":71.54999999999998,"text":"Yikes! No wonder newspapers are full of articles along the lines of How to Survive a Stock Market Crash. Indeed, the charts are scary. They show a long positive run followed by a pause when Iran kicked off and now a month and a half of turbo boost mode, as my four-year-old son might say."}],[{"start":89.69999999999999,"text":"Still, incessant chatter that shares are about to plummet leads me to disagree with Burry that markets today resemble the late 1990s. I was running global equity funds back then, and I can tell you that nearly everyone was bullish right up until the pop. Sure, the Fed warned of irrational exuberance. But the phrase I remember most was that bears “didn’t get it”."}],[{"start":112.14999999999999,"text":"So for me, a crucial question is whether it’s good or bad for stocks that so many people think equities are overvalued. Of course, this isn’t the consensus view — otherwise prices would have already dropped. Indeed, Wall Street estimates for where the S&P 500 will end the year are fast heading towards 8,000 — up another 8 per cent."}],[{"start":132.75,"text":"How I would answer this is not simply a matter of being contrarian — as much as I love to be. It’s more about optionality. Think about a central bank that has already lowered interest rates to almost zero. Should another crisis come along, firepower is limited."}],[{"start":148.3,"text":"In the same way, I’m comforted knowing that a significant number of equity investors are sceptical even as bourses from the US to Zimbabwe trade at record levels. This isn’t money on the sidelines — let me be clear about this fallacy once again. Money doesn’t flow in and out of secondary markets."}],[{"start":166.4,"text":"Rather, these are bears who at least have the capacity to change their minds and push prices higher. If absolutely everyone were in love with US chip stocks last month, it would have been impossible for the index to have rallied another 30 per cent as it did."}],[{"start":181,"text":"It’s this phenomenon — I hazard a guess, because we’ll never know — that explains the extraordinary jump in equities around the world since late March in spite of a list of risks as long as Michael Phelps’s right arm."}],[{"start":192.75,"text":"Either the negatives were priced in by more investors than the positives were, or the latter have surprised more than the former. Certainly bumper US profits have done the most to move people into the bullish camp, if they weren’t there already."}],[{"start":206.6,"text":"I wrote a fortnight ago that we’ve already witnessed one of the biggest upward revisions in earnings forecasts in decades (outside the usual post-slump rebounds), and that one of the main reasons I jumped back into stocks again after being 100 per cent in cash was the hope that AI could be the real deal."}],[{"start":224.35,"text":"My suspicion is that more investors are pondering this too. Or at least are asking themselves, as I did, what if a boost to productivity (and earnings) suddenly makes current equity valuations justifiable — and then some?"}],[{"start":236.9,"text":"Further, I would apply the concept of optionality to the biggest worry some equity investors have at the moment: the narrowness of the gains. For example, fewer than two dozen S&P 500 companies have outperformed the index over the past month."}],[{"start":251.9,"text":"But the flip side is the potential for more stocks to perform better — and this can happen without tech stocks falling in absolute terms. Much will depend, therefore, on whether the benefits of AI spread to more sectors than currently discounted."}],[{"start":null,"text":""}],[{"start":265.2,"text":"I think they will. And I’m minded of the mid-1990s, when everyone first became excited about the internet. Tech shares went bananas initially. But soon it was clear that margins would be boosted in industries as far and wide as logistics or retail."}],[{"start":281.7,"text":"Market concentration did increase during that period. A rising tide lifted all boats, however. Besides, the 10 biggest AI-related companies may account for 40 per cent of the S&P 500 now, but similarly high levels of concentration occurred in 1900, the 1930s and 1960s — as noted in the book Triumph of the Optimists."}],[{"start":304.09999999999997,"text":"In addition, lots of equity markets are more concentrated than the US’s. And by taking the largest share values in the S&P 500 and discounting them backwards at the index return, one can argue that historical concentrations were too low to begin with."}],[{"start":318.95,"text":"Fundamentals justify the emergence of a handful of winners, too. Morgan Stanley calculates that in the decade to 2024, as concentration soared, the 10 biggest stocks accounted for a fifth of the market but almost half the economic profit generated."}],[{"start":334.84999999999997,"text":"I’m betting that profits broaden out while still rising for everyone. Or put another way: AI expands the pie fast enough that even as it’s cut, slices grow in absolute size no matter how many there are."}],[{"start":349.74999999999994,"text":"The author is a former portfolio manager. Email: stuart.kirk@ft.com"}],[{"start":null,"text":"

Stuart Kirk’s holdings

	Assets (£)	Weighting	Total returns YTD
Vanguard FTSE 100 ETF (GBP)	200,198	29.0%	-
iShares MSCI EM Asia ETF (USD)	153,255	22.2%	-
Vanguard FTSE Japan ETF (USD)	70,686	10.2%	-
Vanguard S&P 500 ETF (USD)	72,408	10.5%	-
BlackRock Latin American Ords	67,535	9.8%	-
4.5% Treasury Gilt 2034	126,641	18.3%	-
Total	690,723.00	-	8.10%
S&P 500 (GBP)	-	-	7.2%
Morningstar GBP Allocation 60-80% Equity	-	-	4.8%
Any trades by Stuart Kirk will not take place within 30 days of being discussed in this column

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