Depressed Day Traders (EP. 477)

Episode Summary

Executive Summary: Michael and Ben argue that the market’s continued all-time highs are being driven primarily by the AI capex boom, with hyperscaler spending, earnings growth, and consumer resilience overpowering geopolitical and macro headwinds. They also discuss market concentration, emerging markets as an AI proxy, prediction markets and gambling behavior, housing resilience, media/entertainment trends, and the risks of speculative excess.

Main Topics: AI capex as the central market driver (Priority: 5/5): The hosts contend that the current equity rally is largely explained by massive and still-accelerating spending from hyperscalers on AI infrastructure, which is supporting earnings and sentiment. All-time highs despite macro and geopolitical noise (Priority: 5/5): They note repeated new highs in the S&P 500 even amid war, inflation, higher rates, tariff fears, banking stress, and recession worries, calling the market unusually resilient. Earnings growth and market breadth (Priority: 4/5): They discuss strong Q2 EPS growth, operating earnings at record highs, and improving breadth in parts of the market, while noting that not all stocks are participating equally. Emerging markets and semiconductors as AI exposure (Priority: 4/5): A record valuation discount in emerging markets is framed as a surprising opportunity because Taiwan, South Korea, and tech-heavy EM indices are effectively leveraged to the AI trade. Speculation, prediction markets, and gambling psychology (Priority: 4/5): The episode compares sports betting, day trading, and prediction markets, emphasizing the long-run cost of gambling and the gap between self-perception and actual profitability. Housing, retirement, and wealth effects (Priority: 3/5): The hosts argue housing has been in recession-like conditions for years but prices still rose, and they connect stock-market wealth gains to early retirement and higher 401(k) balances. Media, entertainment, and cultural tangents (Priority: 2/5): They briefly review movies, TV, Disney, Spider-Man, and streaming trends, using them as lighter examples of changing consumer behavior and brand power.

Key Arguments: The AI trade is the dominant force in markets and is overpowering negative headlines and macro shocks. The mega-cap hyperscalers are behaving differently from prior cycles by reinvesting aggressively in long-term infrastructure rather than prioritizing buybacks. Earnings are strong enough to justify elevated equity prices, especially when one-time investment markups are excluded. Emerging markets are no longer just an energy/banks play; with Taiwan and South Korea dominating, they are increasingly an AI/semiconductor proxy. Prediction markets are closer to efficient price discovery than surveys, but they still reflect gambling behavior and a built-in house edge. Stock market gains are reshaping household behavior, including early retirement and higher average retirement balances. When the market eventually turns, it is more likely to be fast and disorderly than a slow grind, due to modern market structure and information flow. Housing prices can rise even during a housing recession, so a downturn in housing activity does not necessarily mean falling home prices. Many people overestimate their trading skill and underestimate the long-run drag from fees, leverage, and bias toward long-shot bets.

Data Points: S&P 500 new all-time highs since 1950: ~1,379 - Ben’s estimate; Michael says the count is roughly 1,468, and they note it represents a small fraction of trading days. New S&P 500 all-time highs in 2024: 26 - They say the year is running ahead of the long-run average. Average annual new highs since 1990: ~21 - Used as a benchmark for the current pace of highs. Rolling 3-year hyperscaler capex forecast: $3 trillion+ - Aggregate rolling 12-month-forward spending outlook for Amazon, Google, Meta, Oracle, and Microsoft. Hyperscaler spending at cycle start: $500 billion - December 2022 starting point for the spending surge. S&P 500 Q2 EPS growth pace: 30% year over year - From Bank of America / Sevita; excludes investment markups from Amazon and Alphabet private holdings. S&P 500 EPS growth including markups: ~50% year over year - They describe this as non-repeatable one-time gains and exclude it from the cleaner figure. Russell 2000 year-to-date return: 22% - Compared with large-cap and equal-weight performance. Equal-weight S&P 500 year-to-date return: 16% - Shows breadth improvement versus the cap-weighted index. S&P 500 year-to-date return: 14% - Cap-weighted index performance at the time of discussion. Companies outperforming S&P 500 year-to-date: 45% - Despite broader gains, less than half the index constituents are beating the benchmark. Energy stocks outperforming this year: 86% - Sector breadth example from Duality Research. Materials stocks outperforming this year: 64% - Sector breadth example from Duality Research. Technology stocks outperforming this year: ~60% - Sector breadth example from Duality Research. Industrials stocks outperforming this year: ~60% - Sector breadth example from Duality Research. MSCI Emerging Markets forward P/E: 9.9x - Bloomberg valuation note after pulling back from a late-June high. S&P 500 forward P/E: 20x - Used to illustrate the EM valuation discount. Emerging markets share composition: Taiwan and South Korea 45%-46%; China ~20%; India ~12% - Shows why EM is increasingly tied to semiconductors and AI. South Korean retail equity participation: 28% - Up from sub-10% during most of the 2010s. South Korean household assets in real estate: 77% - Illustrates how underpenetrated equities still are in some markets. South Korean household assets in equities and bonds: 3.6% - Highlights the potential runway for market participation. Forecast earnings growth for Korea in 2026: 250% - Example of why EM can look cheap on valuation metrics. U.S. gamblers’ cumulative nominal losses since 1929: $3.9 trillion - From Mobius and Callahan paper discussed in relation to prediction markets and betting. U.S. gamblers’ losses in today’s dollars: $5.8 trillion - Inflation-adjusted figure from the same study. Average VIG / house edge: ~4.5% - Discussed as the baseline cost in prediction markets / betting. Men aged 18-29 who trade stocks daily: 25% - From a Bloomberg headline on young men and trading habits. Young daily traders reporting feeling like failures: Two-thirds - Used to underscore the psychological toll of frequent trading. Average 401(k) balance: $160,000+ - Bank of America figure, up from around $100,000 in 2023. Case-Shiller National Home Price Index since Q1 2022: Up almost 12% - Used to argue that housing prices rose despite a housing recession. Toy Story annual global retail sales: $1 billion - Disney franchise economics. Toy Story total income for Disney: $16 billion - Estimate of total franchise value to Disney. ESPN/ESPN2/ABC Q3 viewership: Most watched since 2016 - Attributed in part to major sporting events.

Pivotal Quotes: "AI is the only thing that matters." — Michael / Ben (banter): They use this line to summarize why markets keep ignoring bad headlines. "We would be in a recession without AI." — Michael: Commentary on the macro role of AI-related infrastructure investment. "You probably aren’t rich or well-connected enough to have a 24-year-old incinerate your savings." — Spencer Jakab quoted by the hosts: Used to frame the irony of wealthy investors backing speculative young managers.

Implications: AI capex is now a macro and market pillar, but it may also create future fragility if spending slows. Investors should watch breadth, valuation, and speculative excess alongside the earnings boom.