23 Sep 21st September 2026

Markets Year to Date

I thought I would do something different this week.

In the last couple of weeks I have had several conversations, some with retail clients and some with professional peers.

I am going to summarise them here and try to organise into topics.

AI

The only thing that ever seems to get discussed these days. This comes from a professional conversation.

The fear that AI will take over and wipe out humanity, Skynet style, came up.

Just why would it do that? We would do that if we had the power. Humans are the most aggressive and destructive species on the planet. Give us a chance to wipe each other out and we are hitting the button every time.

To think that AI would do the same is silly. It is a classic case of anthropomorphism. We project our ideas onto AI. Just because we would do it, does that mean that AI will do it? So grow up people and stop thinking science fiction movies are real.

There is another fear of AI and that is misuse of it by bad actors.

This one is very real and will definitely happen.

Anthropic CEO Dario Amodei published an essay calling for a slow down in AI development. Musk and OpenAI both agreed to the principle.

Maybe I have become too sceptical in my old age, but I suspect all of this was more about subterfuge than real concerns. Anthropic says let’s slow down, but in the background ramps up to try and get ahead. It hopes its competitors will agree and they slow their development. Of course, they are not telling the truth either. They will be thinking “HaHa. If Amodei is slowing down here is our chance to overtake him. We will agree publicly but really we speed up and overtake them”

Then we have China. They would be rubbing their hands together thinking of a US slowdown.

So it won’t really happen.

What might happen is the idiots in Europe, followed by our own idiots here might try and restrict AI. I am wondering if these idiots are actually trying to ruin their relevant countries.

What do they think will happen if they throttle AI in their country when other sovereign nations are doing the opposite?

We already have a problem with low productivity. Apparently the idiots say AI will improve productivity. So they have the brilliant idea to then throttle AI.

Surely they are just having one big joke with us and it isn’t real.

Another topic that came up in the professional conversation was valuation and whether AI stocks were overvalued.

Price and Value are two different things.They say price is what you pay and value is what you get.

We can all see the price of a stock, but how we value it is subjective to each of us.

One uniform measure is the PE ratio. Using this then stocks are actually better value now than at the start of the year. Even though prices are 15% up.

At the start of the year, the forward PE for US stocks was 22. It is now down to 19, the long term average.

So they are actually better value than at the start of the year and being at long-term average valuations means they are far from overvalued.

This is no surprise given continued Oil price pressures without any sign of a near term resolution, 10yr interest costs at multi-decade highs and a new Fed Chair with a change in communication and focus.

All we need is confidence to return to the same as the start of the year and we could get another 15% jump in prices.

No, they are not overvalued. Even 15% higher would still not be really overvalued.

Recession

Long-term readers know I do not fear an event driven short-term drop in stock prices, because prices always recover within a few months. Think about Tariff Day, the start of war with Iran and aggressive rate hikes. All of these events have been forgotten about because they cause no long lasting damage

A recessions is a whole different story

Recessions take several years to recover from. So I try to get out before they happen

Right now I have no immediate concerns. The economy is too strong.

But I am concerned about the new Fed Chair Warsh. He has openly said inflation is too high and must come down. Hence why they raised rates last week.

Australia seems to have a similar rhetoric recently and no doubt interest rate rises will follow.

If Warsh is telling the truth about his focus on inflation, then he will need to walk a very fine line. A line hardly any have managed to traverse successfully without destroying the economy.

The only thing that really controls inflation and brings it down, is recession.

The usual run of events is the Central Bank increases rates because inflation is too high (often caused by an oil price shock). But goes too far and slows the economy too much which then spirals into a death roll.

Getting the balance right between enough to cool demand but not too much to tip it over the edge is very difficult.

The previous Chair, Powell, was a pussycat who didn’t want to play this game so left inflation running over 3% rather than be blamed for a recession.

Warsch seems to be cut from a different cloth. Can he achieve his promise without going too far?

I doubt it. Very few have managed it.

So my recession-ometer has ticked up a notch. But only a notch.

The index is too concentrated in Big Tech Names – and this is a problem

This last topic was from another professional conversation. I am guessing because his fund performance was way under the benchmark and he is looking for something to blame.

Yes, the index is heavily weighted to these mega successful Big Tech companies. No companies in the history of the world have been able to grow at such a rate or produce such high profit margins. So it is no wonder they dominate the index today.

But is it a bad thing?

Time to dig out my calculator.

If you look at NVidia, Apple, Alphabet and Microsoft – each of them represents over 5% of the index. Between them they make up 26%.

To put this in perspective, the entire Energy sector is only 3.4% of the index.

I used a mathematical formula for correlation between each of the companies and the index itself. A high correlation would mean the index and the company price movements have a high dependency on each other.

What I found was low dependency. Take NVidia. Only 42% of its price movement can be explained by the index. That means 58% of its price movement has been independent of general market conditions.

Apple is similar at 54% is independent movement.

Which all means these Big Tech names move on their own accord. If they move on their own, then being a large part of the index is no problem.

In fact, for index investors, it is a good thing.

Not so much for fund managers who are producing dismal returns

Big Tech is spending too much on Data Centres

The premise for this one is – we don’t yet know just what kind of financial impact AI will have. Yet Big Tech is spending on Data Centres as if it will be the most profitable invention ever.

It is true that we don’t really know the financial impact it will have. I suspect it will be less than the current thinking.

But Big Tech can afford this build out to see. As know one knows for sure.

If your competitors are willing to spend then you are forced to spend, because, what if it does create massive incomes but you didn’t buy into it ? (like the fund manager above). You cannot take this risk. If they spend, you must spend.

The good thing is, companies like Google produce such massive cash flows that they can afford it.

Usually these guys give that massive cash flow back to shareholders through dividends and share buybacks. They have suspended the buybacks and are using the cash to build Data Centres.

I see no problem with this. It is a no lose to me as a shareholder. If the Data Centre spend works then they (and therefore me) will get rewarded handsomely in future. If it doesn’t and I don’t get the buybacks for a couple of years….well, it doesn’t really make an impact to the long-term prospects for Google.

So I don’t have a problem with it.

Lastly one this topic of AI. The one thing I am sure of is not many of the current crop of AI names will survive. When the internet first hit our computers back in the 1990s, there were thousands of dot com companies. Hardly any survive today. The ones you know are the ones who made it through. Thousands didn’t.

The same thing will happen with AI companies. The easy way to play it is to stick to the majors as they already have existing business models and huge incomes to keep them going when times get tough. The smaller guys……they won’t be here in 10 years. Or most of the won’t anyway. If you can pick which ones will, you are far better than me.

Yeah, nah, I’ll just stick with the big boys.

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.