The Market Faces 3 Existential Concerns as SpaceX Makes Dubious History
The largest initial public offering in history is adding to some concerning trends for the market.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
I have three main concerns around the overall market right now.
The first is valuation levels. By most metrics equities have only been this highly valued once, and that was at the tail end of the internet boom. By some measures, like the Buffett Indicator, this market is even more overbought now than it was then.
Almost all of this is being fueled by the AI narrative and the ensuing surges in tech spending. More and more of this spending is being fueled by large increases in debt and equity issuance. Space Exploration Technologies Corp. (SPCX) will raise $75 billion on Friday via the largest IPO in U.S. history. Anthropic and OpenAI hope to be right behind it with their own massive IPOs. Alphabet (GOOG) raised $85 billion recently via equity issuance and private placements. Oracle (ORCL) just raised its capex budget to up to $95 billion in FY2027 from just under $56 billion in FY2026. The stock was down over 8% in trading Thursday despite posting better-than-expected fourth quarter results.
Then we have the cumulative impacts on inflation and the global economy from the continued closure of the Strait of Hormuz. The market rallied strongly Thursday after the Donald Trump administration stated that a deal to end the conflict with Iran was all but wrapped up. Of course, this followed the president threatening to take Kharg Island a day earlier.
I have no doubt that the U.S. military could achieve this goal relatively quickly. However, in the age of drone technology, it would take continued casualties in holding those facilities. And, as I have highlighted many times on these pages, all of the new technology now available greatly enhances the effectiveness of asymmetrical warfare, something that has been demonstrated throughout the Ukrainian conflict which has entered its fifth year. Hopefully those last points are now moot, and this deal turns out to be real.
That said, investors continue to under weigh the damaging impacts from the closure of this key transit point, a scenario that still could play out despite Thursday’s headlines around a peace deal. Inflation levels are rising at a good clip, which the markets were reminded of again this week. The May CPI showed consumer prices were up 4.25% “officially” in May. This was up from 3.8% in April and this is the highest level since April 2023. Average airline fares increased 27% year-over-year due to surging jet fuel prices.
The May Producer Price Index showed prices increased 1.1% sequentially from April, which in itself was up 1.1% over March’s reading. Year-over-year PPI was up 6.5%, up from 5.7% in April. This was the highest reading since November 2022. I think it is obvious that we can take any potential for a fed unds reduction off the table. New chairman Kevin Warsh’s first act might be an interest rate hike. Obviously, that’s not something the markets are pricing in right now.
Alcoa (AA) posted its largest decline in over a year on Wednesday after management stated that it would have a $60 million unfavorable impact from higher energy prices in Q2. When second quarter earnings season gets underway in a month, the results will reflect three months of impact from this conflict. This is up from just one month in Q1. I expect many companies will report significant and negative ramifications as Alcoa just did when second quarter results hit the wires.
Given these three underlying concerns, my portfolio remains conservatively positioned and is likely to remain so until the market prices in these risks. And even if the Strait of Hormuz is opened by the end of June, it will take many months to restore normalcy to global supply chains.
At the time of publication, Jensen had no positions in any securities mentioned.
