This Chart Doesn’t Say “Bubble Bursting”

The stock market has been in a stealth selloff for the past few months.

Even while the major indices were hitting new highs just a few weeks ago, the majority of stocks were actually moving lower.

Now this correction has begun to impact the larger indices, despite strong earnings results from companies recently.

The latest example is Nvidia.

Even though the company reported exemplary numbers on its earnings call this week, the stock ended the following day down 3.15%.

Nvidia’s latest earnings report — as they all do — brought up speculation over the AI bubble.

My view is that we absolutely are in a bubble.

But the key is to understand what exactly a “bubble” means for stocks and how it plays out over time.

It’s Not Time to Panic (Yet)

Each time a revolutionary technology like AI comes along, we get extreme levels of investor enthusiasm with it.

There’s intense speculative activity with investors misallocating large amounts of their capital.

A lot of capital goes into companies that will never achieve any success. For a period of time, these are the best stocks in the entire market.

Unfortunately, most of these stocks will lead to steep losses. And in many cases, the shares will be worthless.

Is that what’s happening right now? I don’t think so… at least not yet.

Especially not when you see the strong earnings like we saw this last quarter. Not just for Nvidia, but for a broad swath of companies.

Here are some charts from Bespoke Investment Group showing how this most recent quarter ranks relative to other quarters historically.

This most recent quarter ranked in the 90%+ percentile performance for companies beating earnings per share, revenue, and raising guidance.

I’ve invested professionally through bubbles before. I saw the 2008 crash coming. I wasn’t surprised when the dot-com bubble burst.

And I can tell you this is not how the bubble bursts.

Even when it inevitably does, we are prepared with our strategy here at Breaking Profits.

First, we focus on buying real businesses that will succeed even if AI spending falls. They may not reach the same heights of growth, but they will grow nevertheless.

Second, we are disciplined with our profit and loss taking. This allows us to make sure we keep our gains if the market heads for a lengthy pullback.

But it’s my strongly held view that the current bull market has plenty of time left.