In a bull market, stocks charge ahead. In a bear market, they hibernate. Over the last few months, neither of these animal analogies fit the equity market well. The animal that best describes today’s stock market is a duck. On the surface, it appears to glide across the pond with calm stability, but beneath the surface there is frantic paddling.
On the surface, the S&P 500 has gained roughly 20% with a very average annualized volatility of about 18% over the last year. Under the surface, however, the AI megatrend is driving starkly divergent stock outcomes. The Goldman Sachs AI Leaders basket has almost doubled over the period, while the AI At-Risk basket has lost 25% of its market value, with an annualized volatility of almost 40%.
This stock market is an unusual environment for investors. The potential gains and losses from stock specific risk are both large and unpredictable. Traditional securities analysis values companies based on discounting cash flows, but this is less effective when a new technology revolution can potentially multiply future cash flows or make a company obsolete.
So far, at the index level and in most well-diversified portfolios, gains from the AI Leaders are overwhelming the losses from the AI At-Risk. In past periods, harvesting gains from outperforming stocks and reloading on underperforming stocks was a sensible value strategy as outcomes normalized. With the changing technology dynamics, investors cannot assume that outcomes will normalize the way they have in past cycles.