While the S&P 500 trades at a rich 24x forward earnings, its gains are heavily concentrated in the ‘Mag 7,’ whose towering Price-to-Free Cash Flow multiples (eg AMZN’s 174.4x) suggest a market dangerously “priced to perfection.” But a deeper unease is driving gold. Up over 50% this year, its rally resembles the 2011 credit downgrade panic, fueled by fears of currency debasement and US fiscal recklessness, despite moderate 3% inflation. With gold’s recent 8.5% plunge hinting at volatility, investors may be wise to trim those spectacular gains, while the Mag 7 face an extremely high earnings bar
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Are We in an AI Bubble?
Investor enthusiasm for AI is reminiscent of the Internet boom circa 1995. Having worked at Google, I’ve seen AI’s profound impact firsthand, from computer vision to self-driving Waymo vehicles that have achieved 10M rides. But as an investor, the focus must shift to economics: business models, monetization, and valuation. Billionaires like David Einhorn are sounding the alarm: spending hundreds of billions on AI infrastructure may lead to massive capital destruction if CapEx vastly exceeds consumption. History shows that while the technology transforms society, an oversupply creates painful market corrections. The question isn’t if AI is the future—it’s what price you pay for it.
Large Cap Tech: Cautious on Guidance
When Charlie Munger was asked the secret to his success – he answered “I’m rational.” Rational is not paying “33x forward earnings” for a company like Apple or Microsoft – despite their quality. Rational is also not selling the S&P 500 when it plunges to trade at just 16x forward earnings – because you are worried about a possible recession. Rational is adding exposure to high quality assets when they are at or below their long-term mean. And the more below the mean they trade – the stronger your (long-term) conviction should be.