Open AI’s Valuation: Sign of AI Confidence or Froth?

This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.

AI Trade Looks Frothy

Sevens Report
Kinsale Trading
Oct. 3: The tech sector, semiconductor stocks, and anything AI-related caught a solid morning bid yesterday on the news that OpenAI’s latest secondary stock offering period, during which employees were permitted to sell up to $10 billion in personal equity holdings on the secondary market, resulted in a sizeable valuation of ~$500 billion for the AI startup. The question facing investors after the latest valuation round is whether this secondary stock event shored up confidence in the AI narrative or suggests “AI froth” is reaching extreme levels that could see a potential “AI-bubble” pop in the not-too-distant future…

Bottom line, the news initially sparked a wave of fresh risk-on AI optimism in big-tech stocks. However, the “fade” from the opening highs in staple AI names like NVDA, and the fact that SOX (semiconductor index) ended with a solid gain but closed below where it opened suggest there is growing hesitation to meaningfully chase the AI trade from its historically expensive level. The risk that we see the AI narrative challenged in the weeks/months ahead is rising and has the potential to spark a meaningful profit-taking pullback in tech and the broader equity market.

Tom Essaye

Labor Demand Is Cooling

Economics
Renaissance Macro Research
Oct. 3: Normally, we would be reviewing The Employment Situation. But with the Bureau of Labor Statistics deemed non-essential [during the shutdown], we’re forced to seek out other pieces of labor-market information. Excess labor demand continues to cool. According to Indeed, overall job postings slid to a fresh low for the week ended Sept. 26, a decline of 8.9% against last year.

Within industries, we were struck by the ongoing slowing in retail industry job postings; this is something to consider given the recent strength in consumers’ spending.

Neil Dutta

Bullish Seasonal Trend

Monthly Navigator
Truist Advisory Group
Oct. 2: The fourth quarter has historically been the market’s strongest. Since the 1950s, the S&P 500 has posted gains in 80% of Q4s, averaging a 4.2% return.

Years with strong momentum heading into Q4 tend to see a stronger Q4 relative to other years. Notably, when the index records 25+ new highs by the end of Q3—as it has this year—the market finishes Q4 up 5.2% on average, with gains in 89% of cases.

However, pullbacks are common—Q4 has seen greater than 5% declines in 42 of the past 75 years (or 56%), with a median pullback of 5.6%, even while stocks still end up higher, on average.

Keith Lerner and Team

Chasing the Market Higher

Insights
Heritage Capital
Oct. 1: The great performance chase to year-end remains in full motion. As hard to believe as it is, there remain way too many professionals with large cash positions or hedged portfolios from back in late Q1 and early Q2. Their portfolios are woefully trailing a benchmark they are paid to keep pace with. They keep hoping and praying for a 10%+ correction which is one reason why it’s not coming. Of course, after a 20% decline like we saw earlier this year, it is very rare to see another double-digit decline within a year. This situation alone is reason to believe that while stocks do not need to stay on this trajectory, declines should be shallow, 5% or less, and met with buying.

I will leave you with this. For all the Chicken Little cries that the sky is falling and the bull market is over because of a bubble that doesn’t exist, participation remains adequate to solid. Bear markets do not begin with the New York Stock Exchange Advance/Decline Line two weeks removed from all-time highs.

Paul Schatz

The Neutral Rate Debate

Nolte Notes
Murphy & Sylvest Wealth Management
Sept. 28: Much of the discussion from various Federal Reserve governors centers around the amorphous “neutral rate” or the interest rate that is neither too easy nor too tight, but just right. The problem with trying to define the neutral rate is that it is not a fixed rate that is stable over time. It is unobservable, and the Fed uses a variety of models to try to determine that rate in real time. Today, it is estimated to be 3.7%, while the current fed funds rate is between 4% and 4.25%. Meaning to many on the Fed, interest rates are too high and should move toward that 3.7% figure.

This also assumes that the Fed is correct that inflation trends toward its 2% target over the next two years. Funny thing, for the past four years, the Fed has been projecting inflation to reach its 2% target over the next two years. We are still waiting.

Moving from the ethereal to the practical, there seems to be plenty of money floating around the economy and financial markets, indicating a lack of stress or worries about monetary policy being too tight.

Paul J. Nolte

Good News for Berkshire

Market Insights
Glenview Trust
Sept. 28: A recent Barron’s article discussed the potential earnings impact on Berkshire from the expected decline in short-term yields, but the article focused only on the first-order effects.

The second-order impacts are important. Berkshire still operates a ton of businesses and owns lots of publicly traded companies, both of which will likely do better if the Fed’s rate cuts keep the economy rolling. Berkshire also has significant exposure to housing through its building products and retail operations. The building products themselves should account for approximately 8% of revenues in 2025. If the lower rates stimulate housing activity, the earnings leverage should be substantial.

Bill Stone

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