AIA Newsletter April 2025
Reality Sets In
Q1 2025 AIA Performance Report
AIA Portfolio
AIA Dividend Portfolio
Both portfolios outperformed the S&P 500 in Q1 2025. This outperformance was due to the rotation out of tech stocks and into value and resource stocks, as well as emerging markets. I expect this rotation and outperformance will likely continue into Q2.
Note: This was written before the market turmoil related to tariffs.
Commentary
Wall Street and the market are always looking for the next big thing—the big story or theme that can be sold to the public and used to convince investors to buy stocks at ever-higher valuations. Overvaluation doesn’t matter because this time is different. Honk, honk, wink, wink.
Investors were led to believe that AI and its productivity gains would be the next “big thing.” Although we have seen some productivity gains from artificial intelligence (AI), the miracle on which the technology sells itself has yet to materialize.
However, companies must dominate their space for a long period of time to justify current valuations. DeepSeek recently questioned this, suggesting AI could become easier, cheaper, and more widespread than first imagined. This could have second and third-tier effects on companies’ ability to monetize AI effectively.
What if AI becomes commoditized and costs plummet? How will tech companies recoup the billions and hundreds of billions yet to be invested? Many tech giants are currently capital-light businesses with high margins. Becoming a capital-intensive business is not on most analysts’ or investors’ bingo cards and would likely cause a reassessment of these companies' investment merits.
What happens if these companies invest billions of dollars into data centers and power plants to power them, and can’t get a decent return on this investment? What does that do to the valuations of these companies? What happens when the bubble pops?
We can look at past bubble eras to understand what can happen to valuations once the bubble pops.
The chart above shows the top 10 S&P 500 stocks by market cap as a percentage of the total S&P 500 market cap. The AI bubble and concentration in AI stocks far exceed the internet bubble in 1999-2000 or the Nifty-Fifty era of the mid-1970s.
What is a death cross? It is a technical term for when the 50-moving average closes below the 200-day moving average. It typically indicates a breakdown in a stock’s momentum. It can be a temporary situation or lead to a more substantial downturn in price.
Paul Tudor Jones, a famous money manager, has the following to say about the 200-dma:
Tony Robbins: So my next question is, how do you determine the trend?
Paul Tudor Jones: My metric for everything I look at is the 200-day moving average of closing prices. I’ve seen too many things go to zero, stocks and commodities. The whole trick in investing is: “How do I keep from losing everything?” If you use the 200-day moving average rule, then you get out. You play defense, and you get out.
The narrative around AI is beginning to wilt. The price action of the stocks is deteriorating, valuations are already high,, and we have a technical breakdown.
I have been anticipating a rotation out of AI and tech into undervalued sectors like commodities, energy, and foreign and emerging markets. This is precisely what appears to be happening now.
The chart above shows the returns of many foreign markets. This is happening as capital, including foreign capital, leaks out of tech and rotates back into foreign investors’ home markets.
This is a relatively rapid change of heart by foreign investors. I recently reported how foreigners were putting record amounts of capital into the US market. They now seem to be changing their minds.
It seems the rotation is now happening as I thought. Whether this has legs or is a temporary phenomenon remains to be seen. If it has legs, this rotation could last for a few years. The AIA portfolio is positioned for this rotation.
I want to shift to another recent news item that could positively impact our portfolio and ultimately force me to reassess many of my assumptions about the potential for US economic decline.