Santa's back. During the past week, the S&P 500 recovered most of what it lost the week before when it was knocked down hard by the plunge in bitcoin and by fears that the AI bubble-bursting story was true, just as the AI bubble storytellers have been warning. Here is the story we told in a QuickTakes on November 23: "Once their panic selling [of bitcoin] subsides, the stock market should recover. That could happen over the next couple of weeks, setting the stock market up for a good year-end rally." So far, so good.
The AI trade short sellers have been saying that Nvidia's GPUs depreciate much faster than hyperscalers’ accounting practices suggest, thereby unduly inflating their earnings. The shorters contend that newer versions of GPUs will make today's GPUs obsolete in no time. They note that producing LLMs has become a highly competitive sport, likely leading to profit-margin implosions. They rightly observe that the OpenAI ecosystem hinges precariously on a privately held company that is losing money and has a hypster with radical views running the show.
Then last week, Alphabet's stock price jumped on news that Gemini-3, its latest LLM, is better than its competitors' LLMs and was trained on a cheaper Google TPU chip. The broad stock market rebounded even though semiconductor stock price indexes, which had led the stock market rout a week ago, didn't recover much this past week, as Nvidia remained down and out (chart).
The S&P 500 rose back above its 50-day moving average last week and now appears to be back on track to hit 7,000 in a year-end Santa Claus rally. NY Fed President John Williams played Santa on Friday, November 21, when he said a "further adjustment in the near term" for interest rates is likely. Investors took it as a strong signal that another Fed rate cut could come on December 10, when the FOMC concludes its two-day meeting. Ho, ho, ho!
The S&P 500 will need to rise by just 2.2% to reach 7,000 (chart). That could happen this coming week, in our opinion.
The Nasdaq will have to rise by only 2.5% to reach a new record high (chart).
