The term “parabolic” by definition: share price movement on a chart resembles the shape of a parabola — a curve heading higher that gets steeper and steeper, typically happens on intense buying activity, often driven by speculative behavior, hype, or fear of missing out (FOMO). Much more elegant than my rocket ship analogy of a few weeks back and the term was bandied about numerous times in the financial media last week. It's not hard to find a few examples:

•  Dell's blowout Qtr1 results and guidance was the latest highlight in the ongoing AI infrastructure story. The company noted a 750%+ y/y (year over year) increase in AI server revenue, $24.4B in AI orders plus a big increase order backlog. The shares jumped 28 ½% in a day !!
•  Snowflake surged 36% following earnings on a bullish AI narrative. The company noted better-than-expected product revenue growth with AI offerings a key tailwind.  Snowflake also announced a $6B chip deal with AWS. (Amazon Web Services)

These moves helped make for another strong week in technology shares, which, as I have noted before, along with the energy sector have provided the bulk of the US stock market gains for the week and indeed for the year. The technology heavy NASDAQ was up 2.4% for the week and the semiconductor index up 81% year to date. These gains were dwarfed by the South Korean market whose index is heavily weighted to technology (Taiwan Semiconductor being the biggie) as the market gained 10% for the week and up 118 % for the year.

While I wasn't overly concerned about the AI bubble talk last year, these ongoing huge daily price jumps have definitely raised my caution level. As a portfolio manager I believe rule #1 is to protect client’s capital and Rule #2 never forget rule #1 😊. Thus, I find it very hard to justify purchases of many companies at these extremely elevated levels. Let us not forget much of the gains have been driven by the anticipation of huge increases in companies’ profits and revenues benefitting from multiyear capital spending (CAPEX) for AI development from corporations such as Microsoft, Google, Amazon, Chat GPT and SpaceX.

Simple math tells me that if you spend billions and billions of dollars in capital, if the anticipated billions and billions of dollars of increased revenue and especially profits don't follow, there is going to be widespread investor disappointment. It almost seems investors are banking the profits now and hoping that the revenues follow in due course. This leaves little room for disappointment and makes investing even more challenging.

For an illustration of what happens should reality not equal hype: late last year shares of Oracle gained over 48% in a day following the company reporting a huge increase in its order backlog and forecast impressive profits in 2027 revenue, all driven by AI demand. Over the next couple of months as actual corporate earnings fell below heightened expectations and concerns arose whether the company could actually deliver on its enthusiastic forecasts, the shares collapsed some 60% wiping out all the one-day gains and more. That's the problem with parabolic rises when they end, it’s very difficult to gauge how far the share price will fall.

To add to my concern should the promised IPOs of SpaceX, Chat GPT and Anthropic come to fruition over the next few months we are talking about some 3 1/2 trillion dollars of new investments, funding which has to come from somewhere. As far as I know none of these companies are anywhere close to being profitable enough to support these lofty valuations.

While in the real world, even though oil prices slightly dropped last week, inflation and interest rates stay elevated and unlikely to drop meaningfully anytime soon. By all accounts consumers are stretched, the Wall Street Journal reported this weekend Americans are facing $1.25 trillion credit card debt, and personal savings level fell to the lowest in four years. I think one can assume similar challenges in many other countries. while in Middle East we are witnessing the longest running imminent peace deal ever!

Having said all that, currently investors are not sharing my concerns as it was another positive week for global markets, with many joining the major US indices and making all-time highs. And there's no sign of the AI story ending anytime soon, as just today Softbank the Japanese multinational investment company, announced it would invest $50 billion in French Data  centers .

Dennis