For those of you who would prefer to listen:
Up, up, and away has certainly been the theme for stocks all Spring. Actually, blast off is more like it. Nothing has stalled this mighty ascent. Tech Stocks continue to lead the charge higher. The Stock Market hasn’t cared about rising interest rates, high gas prices, nagging inflation, nor a war in the Middle East. It just has not cared. It’s also caught so many by surprise.
Tech has been on a tear. The S&P 500 Technology sector gained nearly 20% in April. Its super strength continued in May. The last time the Tech sector recorded back-to-back double-digit monthly gains was in March and April of 2009. That was when the Bear Market from the Financial Crisis bottomed. Before that, it had only happened 4 other times, ever. Keep in mind, ever is a long time. For more perspective, this was the best 2-month run for Tech since 2002, which was the bottom after the Dot-com bubble burst. Importantly, those events came at major Market lows, giving birth to new Bulls. The difference with today: It’s happening at all-time highs. This Bull run has been beyond impressive.
Explosive earnings growth on the back of the massive AI spend is what has sent stocks skyward. Remember, more than anything else, it’s earnings that drive stock prices. S&P companies grew earnings by 28% in Q1, nearly doubling the expectations. The Mag 7 reported a blended 63% increase in earnings compared to a year ago. It’s been incredible growth. But the growth has been experienced across the board. The other 493 companies recorded 17% growth last quarter, far surpassing Street estimates. Leadership has been quite concentrated, reflecting the AI-trade. Not all stocks have been participating. Tech in general has been super strong. Semiconductors have gone parabolic. Despite the fresh record highs, heading into Friday, there were only 18 stocks in the S&P 500 sitting at 52-week highs. What’s more, there were 10 that were at lows on the year. They are much smaller in size, which has less impact on the Stock Market. It’s the AI-trade that’s dominating everything.
The concentration is palpable. Just 4 companies, Alphabet, Amazon, Nvidia and Meta, accounted for 71% of the Q1 earnings growth. It supercharged the Spring rally. However, 7 of the 11 S&P sectors were actually down in the month of May. Tech has definitely been carrying the load.
There are some new signs of rotation, though. Other sectors, like Transportation, Health Care and Aerospace & Defense, caught a bid this week. Lower Oil prices, with continued expectations for an extended ceasefire, are helping there. Geopolitics tend to be ignored by the Market, until they’re not. It’s never clear when that is. But the Market sure seems to be pricing in a more favorable outcome than it had prior. We anticipate the conflict with Iran to still be an issue throughout the rest of the year.
Stating the obvious, 2026 has already been hyper-eventful. It’s still not quite half done either. This will prove to be a year for IPOs, too. After a fairly dormant stretch, things are about to get really active. 3 large, yet private, companies stand out. Long rumored to go public, it appears that now is the time. SpaceX is slated to make its Stock Market debut on the NASDAQ on June 12. It is expected to be valued around $1.8 Trillion. That would shatter all previous records. Another, Anthropic, just passed OpenAI with an almost $1 Trillion valuation. Both pure-play AI start-ups plan to IPO later this year. The AI race is heating up even more, if you can believe it.
Part of the issue is so many fast-growing innovative Tech companies have stayed private far longer than historically. Increased regulations following the Financial Crisis made it more onerous for public companies. Many companies didn’t want to deal with the heightened scrutiny. It’s particularly the case with such cutting-edge organizations. Venture capitalists and early institutional investors have maintained their large ownership for years. Large amounts of money have fueled their rises and inflated their values. These investors will be finally cashing in on massive gains when they sell their stock to the new, largely retail buyers. That gives you immediate pause. It’s exit liquidity for those early investors.
Initial Public Offerings used to be the birthing grounds for Tech. Now it’s more like teenagers or even middle-aged, where the fastest growth days could be over. These innovative companies are going public at very high prices. But make no mistake, they’re still growing. This AI revolution is like nothing anyone has ever seen.
There is so much hype around these IPO’s. Investors have been excited about the prospects for SpaceX for the better part of 2 decades. The company was founded by Elon Musk in 2002. SpaceX is estimated to come public close to a $1.8 Trillion valuation. That crushes anything prior. More on that in a minute.
Most importantly, there’s this: Deal terms matter. Elon Musk and other insiders own the B shares, which allow 10 votes per share owned. Individual investors will be buying the A shares in the IPO, which carry 1 vote. Musk’s retained voting power will be 85%. There is no other publicly traded company that has anything close for an individual owner. It’s a key component of the Elon Empire. What’s more, the price talk has SpaceX valued at roughly 100X its revenue. The company is also far from profitable. For perspective, Amazon trades at 3X sales. Alphabet trades at 6X sales. Nvidia trades at 20X sales. And they’re all 3 extremely profitable. So there’s that.
In case you’re wondering, Nvidia went public in 1999 at a valuation of $340 Million. Amazon IPO’d 2 years prior, valuing the company at $438 Million. Apple was a standout, going public in 1980, worth over $1 Billion. It was the largest IPO since the Ford Motor Company went public in 1956. Now that’s some history. Facebook holds the record today. Now called Meta, the company IPO’d in 2012 at $81 Billion. For those of you that remember, the Facebook IPO was not considered a success. It took 14 months to regain its IPO price, having fallen over 50% in the interim. We must never forget, IPO’s are not for everyone.
The idea for the next big thing to support the AI-race is to send it to space. It’s being called “Orbital AI”. Both Elon Musk and Jeff Bezos, amongst many other Silicon Valley leaders, believe building out data centers in outer space will solve many issues. First and foremost, there is a limitless energy source from the Sun. Satellites have run on solar power for decades. But these data centers would require a whole lot more energy. The data centers require vast amounts of cooling. Check: Space is really cold. Regulating could be challenging, though. If doable, data centers in space would also bypass the growing protests of massive data center buildouts on Earth.
The International Space Station generates enough electricity to power roughly 100 advanced AI chips. An orbital data center would likely need to produce electricity to power Thousands of chips inside Thousands of satellites. Elon Musk thinks SpaceX has the solutions. There’s a large squad of believers. Major investments are being made. This is where the major confluence of big ideas and the ability to execute meets a mountain of hype. And investors ride the wild rapids while trying to avoid the rocks. Ok, I’m mixing metaphors now. But you get the point.
Back to the Market:
Just like rockets, stocks don’t go skyward forever. They require rest, refueling and reassessment. Corrections do just that. It’s never obvious when it happens. But it’s always an inevitability. Perhaps the SpaceX IPO marks another near-term top. There are many elements of bubble-like conditions in place. But bubbles rarely pop when there’s a bubble in calling bubbles. They tend to inflate more. This Springtime rally has been just remarkable, in the face of so many pressures. The Market has been looking past the on-again, off-again rhetoric around Iran for weeks and pricing in some sort of ceasefire and resolution. The December contract for Oil is $77, a far cry from the $100+ hit early in the conflict. No matter; We are used to uncertainties. We’ve been at this a while. We are long-term investors equipped to deal with short-term issues. We are prepared for whatever comes our way. That’s long been the Bedell Frazier way.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
