Daily Commentary

MarketMinder’s View: Piggybacking on our recent article on AI fears and Software stocks—not to mention the panic in commercial real estate brokers, logistics and asset management stocks—this is a pretty good dose of sanity. It does a great job making the case for this being a sentiment-induced pullback, not evidence AI is actually going to cause mass job destruction. People overreacted to reports and theories before anyone took the time to test whether any of it was true in any meaningful timeframe, leaping instead to the old “this time is different” fallacy. One analyst “says the fears that shook the stock market are based on sentiment and not evidence: no one has had time to evaluate the performance of an [AI]-powered wealth manager. ‘It’s a knee-jerk reaction,’ he said. ‘How true is it? Look, there’s plenty of leaders out there who thought, I can replace people with AI at the beginning. And a lot of people acted on that. And I think one of the things that’s being found out is that for a lot of cases, no, it hasn’t panned out.’” Another notes: “‘History shows a repeated pattern of there being a significant lag between a technology working in a lab and it permeating the wider economy, as well as a chasm between early adopters and the majority of users,’” And within that significant lag, markets adapt gradually and new, unexpected jobs generally arise. That is how it always is with new tools. So overall, sentiment indeed looks to have overshot to the downside, extending this bull market’s wall of worry.

MarketMinder’s View: Look, we agree the “Magnificent Seven” Tech and Tech-like stocks’ large weighting in the S&P 500 doesn’t make the index inherently riskier or undiversified, but the reasoning presented here is off-base and strikes us as dangerous. We do appreciate the observation that five of the Mag Seven lagged the S&P 500 last year and clearly didn’t make or break its return. That is a good point and also a reminder that MarketMinder doesn’t make individual security recommendations (we are here for the broad theme only). But this heads down the wrong path: “Giant companies, even in the same industry, have much more-diversified economic exposures than smaller companies do. That’s why, [two researchers] find, investing in only a handful of the biggest companies has ‘essentially the same’ riskiness as owning all the rest of the stocks in the S&P 500 combined. ‘The largest stocks are just safer,’ [one analyst] says—making them intrinsically well-diversified.” No. There is no such thing as a “safe” stock. All carry the risk of loss, and sometimes large stocks get hammered during bear markets. Saying you don’t need to diversify because the large companies diversified themselves for you is like saying you don’t need global exposure if you have enough US-based multinationals. We think the correct move here is to note the concentrations within the S&P 500 and then ensure you are invested globally to mitigate US-specific risks and widen your opportunity set. The Mag Seven’s collective 20.9% weighting in the MSCI World Index (per FactSet), far less than its 33% weighting in the S&P 500, is an easy way to see this.

MarketMinder’s View: This is mostly just an interesting FYI. Germany has a constitutional amendment requiring the “structural deficit,” which is basically the budget deficit excluding natural disasters and recessions, to be 0.35% of GDP or less. Last year, the Bundestag amended this “debt brake” to exclude spending on national defense, creating more headroom for public infrastructure investment. Now, lawmakers are debating excluding investment in critical minerals (think: rare earths) and their supply chains, which would grant further flexibility. This echoes broader trends in countries outside China investing to curb their reliance on the Middle Kingdom, which has long used subsidies and state investments to keep refining costs low, making it uneconomical for other nations elsewhere to ramp up. That calculus is changing amid various Chinese export restrictions, unleashing investment elsewhere. This is all very well-known to markets, not some massive bull market driver for stocks broadly or the Materials sector. But it is interesting. Germany’s move in particular will probably spark cheer about more wiggle room for fiscal stimulus to boost its stagnant economy, so here is a friendly reminder that German stocks have done great without big stimulus. Stuff like this gets pre-priced really fast, and stocks don’t hinge on government largesse. Private sector profits are what matter.