The Best AI Trade Might Not Be AI At All

Over the past week, the average financial advisor and fund manager sold down exposure in the S&P 500.

By over 9%, and that’s on top of 12% from the previous week.

The decision comes as volatility at the single stock level began to spike up, with earnings volatility coming from names like Broadcom and now Oracle (both down over 10% since earnings).

And that’s the poker table moment when you find out who has the cards.

It’s not them…

If anything, this behavior tells me that the average advisor and fund manager is tied up with too much AI and tech exposure, considering that the rest of the market (probably 480 stocks) are trading at low volatility and attractive valuations.

So in a sense, you’re paying fees to a manager, or another “furu” to merely match what the market has done and take tons of unnecessary risks.

The question is, are they (and are you) aware of what’s happening underneath?

Do you even know there are “boring” businesses loaded with double-digit upside potential just waiting to be discovered?

We broke down the Domino’s Deep Dive for you already, and it’s been crushing the market by 5%.

Will you be part of what’s next? Become an Offside Premium member now.

63 consecutive months.

That’s how long the Consumer Price Index (CPI) has been above the Fed’s target of 2%.
In other words, inflation has gotten out of control.

Most economists and media talking heads will blame this trend on the Iran war, but last I checked it’s only been four months since the Hormuz disruption, not 63.

In fact, I ran through the latest Price Producer Index (PPI) numbers this Thursday and found something very interesting.

First off, the index is now at over 13%, the hottest inflation reading since 2023.

Then, breaking out the commodity type, you quickly find out two very obvious trends:

The index for final demand less food and energy (no Iran effect) is up 0.8%.

Now here are the industries that drove inflation the most inside that segment:

Most of these are necessary inputs in semiconductor fabs and data centers.

So there you have the input side of the equation, confirming AI is in fact inflationary for the economy.

Now for the output.

Citadel posted a very interesting research report on the economics of AI.

As you can see, the whole narrative behind the technology is beginning to fail in real time.

The most disrupted jobs from software engineering to customer service have proven not so disrupted in recent months.

In fact,

Employers who let go of hundreds of people after drinking the AI replacement Kool-Aid are now actively hiring those people back and then some.

Microsoft and Uber have been the most public case studies in this whole mess…

Both companies explicitly reported that AI is far more expensive, and less productive, than human labor is.

Which raises the question of whether AI is truly as beneficial to the global economy as they say.

From the input side, inflationary.
Output and end user side, inflationary.

Since inflation matters again, we should do an exercise around it, and really figure out what type of returns we can expect from the stock market.

The concept of the earnings yield is the foundation for comparing investments against the risk-free nature of treasury bonds.

At a 31x P/E, the S&P 500’s earnings yield is:

With the 10yr treasury bond yield at 4.5% or so, that’s a spread of 1.3%.

Using very rough math, this means that the S&P needs to grow its earnings by 20% uninterrupted every year for the next decade in order to match the risk-free rate.

How likely is that?

Not that much.

Here are the biggest holdings in the S&P, making up over 40% of the index:

In next week’s Offside Premium post, we will continue digging into the slowing AI earnings situation, and why most of these companies are involved in a sickening accounting loophole.

A loophole designed to inflate their earnings.

Here’s a brief recap of NVIDIA’s books:

All combined, NVIDIA’s earnings should be HALF of what they reported.

Meaning,

Their current 31x P/E should be more like 62x since no actual earnings came into the business.

Surprisingly,

Amazon and Google are misleading investors in just the same way.

So I ask,

How will the S&P grow earnings by 20% for the next decade when its biggest companies are artificially inflating their earnings, a practice that eventually adjusts to real cash earnings?

Whatever your opinion on this AI race is, keep in mind bonds now offer a better yield than stocks, and there’s a pretty high bar set for the market to beat if they want to outperform the bond market.

Far from being an overly bearish post, this should serve as a compass for you to think through the current market.

I’m not a bear, I’ve actually been buying heavy into select equities.

Domino’s Pizza is one of them.
Nintendo might be next.

Would you like to benefit from the next batch of winners?

The best way to do it is with access to the right research.

Most investors will never have this advantage.

But that’s exactly what you get as an Offside Premium member.

Here’s a summary of what you’ll get if you get in before the doors close:

And more…

For $2 a day, you can scale your wealth with my Offside picks.

That’s a tiny fraction of what you can make on one 5-bagger, and as a member, you’ll get one of these every month pitched to you.

Click here to claim your spot, and I’ll see you inside.

You probably thought about it reading the section on bonds vs stocks.

But one of the most attractive setups here is the TLT bond ETF, especially if we think that AI is inflationary (hard to say no with all the evidence).

Think about the outcomes:

Whichever way you look at it, bonds are attractive.

But there’s something else that looks just as good:

I’ve been trying to get into the AI trade besides Intel at $19 a share and Micron at $400, and I just can’t find any logical way to do it.

So I thought,

What works no matter if AI is successful or not?

It’s clearly software, though specific SaaS I’ll say.

When you ask Claude or ChatGPT to output a spreadsheet, report, image, video, what have you…

It is all edited and manipulated or delivered through software in one way or another.

Which is where:

All come into play as the bridge between an AI output and a user-enabled way to benefit from the output.

Adobe just beat earnings for 14-consecutive quarters, and its AI revenue tripled to prove my point.

I’ll be diving into that deal and several others in software this month.

Become an Offside Premium member to get the details now.

Here are some thoughts to take home on the SpaceX IPO as Ben Felix attempts to answer the question about the largest IPO in history:

Until next time,

OFFSIDE RESEARCH

Against the Tape, Ahead of the Curve.