Money going to AI stocks is a problem, and how it can be fixed
We don’t have enough money coming into this market. Funds flow only to stocks tied to data center construction and a few others. Even important data center “stories,” like warehouse REITs and equipment stocks like Cummins and Dover, can survive if they have healthy data center orders — not much else. While the aerospace sector is down in anticipation of a long war in Iran, the action in the sector’s defense names ( RTX , GE Aerospace, Honeywell) has been negative. That is a sign that there is not enough money to cover the uncertain future, as the current period is still tight. The most confusing part of this market is the completion of healthcare, especially pharma. Just as anything related to the data center is a blessing, anything related to pharma is a nightmare. When I had Thermo Fisher CEO Marc Casper on “Mad Money” last week, I was surprised to see how much the stock had fallen despite his confidence and strong quarterly numbers for the medical and medical device maker. They were met with brutality. Danaher is a similar story. The life sciences company has been a disaster for many years, so quarterly renewal nightmares are now the norm. It’s almost as if the company expects negative results and appreciates them. At least Thermo Fisher comes out and defends itself. Danaher is hiding, though I’m not sure where he’s from, since management seems to be more accepting of the minimum. The old Danaher would retool the deck or have something that didn’t take care of health to balance the power of the dealers. That’s not the case anymore. But it may not matter right now. Consider the case of Abbott Labs. I know this sounds strange for a stock listed in the sub-$90s, but the medical device maker is a very good company. However the free fall is so obvious I can see why people, even at this low cost, might want to avoid it. What should keep Abbott from falling into the $80s if health care is taken out? The same applies to Cardinal Health. I agree that this Club stock has been a disaster, but I’m glad we haven’t bought it to get points, which should allow us to get a good base when we see the quarter on Thursday. This kind of decline usually portends a really low set of results, but I’m betting that this drug and medical supplies distributor is actually beating quarterly estimates. There is nothing wrong with the Cardinal that more money coming into the market will not cure. The scariest stock in my book is Johnson & Johnson. Here’s a stock that ran into the $200s with great numbers. Then it brought in a second set of equally good numbers, and it didn’t mean anything; the stock is down about 5% since then. The problem now is, of all things, the chart, which is so bad that it calls into question all the volatile breakouts and pulls back to $180 the most likely place to hit. This would be an unimaginable decline in any other market. But in this case, where the fundamentals are indistinguishable, and 19 times returns seem to be the same as 16 times returns, it seems to be happening. Consider the surprising nature of the ambiguous price-to-earnings ratio of one of the most diverse companies in the world at J & J, with a triple-A balance sheet, 18 potential blockbuster drugs, and the removal of a prosaic low-multiple skeletal division. But this action has a feeling, however small, that there may be a dissolution of a great movement that seems to be forever. This is doomsday thinking, but it keeps the rate low in my pocket until there is more evidence that my premise on this piece is wrong. Now it’s easier to just stop at the cash flow analysis. It’s easy to be glib. But we have to think how this is possible? There is no doubt that the market has witnessed the Fourth Industrial Revolution. As a student of Nvidia CEO Jensen Huang, and a happy one at that, I get this concept on point. Why not stick to stocks at the heart of the AI boom, like Intel, Arm, AMD, Corning, and Qnity? Why turn to Texas Instruments and Lam Research? Amazon and Alphabet represent data center conglomerates. If you are not one of these, you are simply not a believer. Notice I didn’t include Nvidia? That’s because Nvidia is not an option. It is a perquisite. In fact, it seems unusual that the perquisite was suspended until last Friday. But sometimes this savvy trader sees a sad trade when he sees one. There have been big sellers going out of stock. I’m talking about a few traders who arguably have more than 10 million shares. These traders recently lived in the $90s, but had a lot of their shares traded at the $200 level. If a stock goes from $200 to $208 in a heartbeat without news, that’s a sign that the sellers have been cleaned out. What you need to realize is that the profit from those sold shares is set aside or returned to another heart of the data center, perhaps distribution, communications, or the Mac Daddy of the group, GE Vernova, which makes machines that convert natural gas into electricity. It also builds and supports nuclear reactors as a power source for AI construction. There are only a few other nuclear games, and most of them are chimerical. You need to know how rare this capped deposit really is. It doesn’t just go astray. When he leaves the team, he seems to come into money. There is no net underneath. Normally, I wouldn’t worry about this financial split if it weren’t for what’s waiting in the wings: the initial public offerings of SpaceX, OpenAI, and Anthropic. The first, SpaceX, will undoubtedly be such a powerful magnet that it will take money out of the S & P 500 to buy it. Nvidia will suffer from both investors selling its stock and the exit of the S & P 500. The overpayment of SpaceX will be so large that it would warrant an investigation into how the IPO process works. I hope Anthropic and OpenAI are delayed because of OpenAI’s weird ownership structure—a non-profit controlling a for-profit company—or because Anthropic appears to be bankrupt. We need this to happen in order for the market to continue its development. If these two are put aside, we can look to SpaceX. Otherwise, it will lead to a cul-de-sac market, but no deck reshuffling. Can the market really handle the concentration? Yes, if there are not many new companies entering the market. But it sounds remarkably like the period from January 1999 to April 2000, when the only thing worth investing in was the Internet, and companies like Johnson & Johnson and Bristol Myers saw their P/Es shrink in the same way. That April shift from the Internet back to health care stocks was not caused by the bond market, which is a common culprit, but the IPO market, where bankers issued more than 300 worthless offerings. Supply killed that bull. So, as long as we don’t have too many IPOs coming up and the big three SpaceX launches, we can get through this period without an earthquake. But there is one make-or-break moment ahead: Wednesday, when Alphabet, Amazon, Meta, and Microsoft report (Apple is Thursday). Only Nvidia has a bigger impact on the market than these megacaps. If we finish the next week or two in these terms that will pay off, then the investment of the Fourth Industrial Revolution will remain popular for a long time. (See here for a full list of stocks from Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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