Trump vs Biden: What's Next for the S&P 500 and Nvidia’s Rally?

The US tech sector has dominated the market for so long that it has almost come to be taken for granted: Nvidia stock is now in almost every portfolio. However, Michael Gayed, author of The Lead-Lag Report, tells OPTO Sessions why he believes the artificial intelligence (AI) rally could be the final chapter in the story of big tech.

Michael Gayed is Portfolio Manager at Tide Financial Group and author of The Lead-Lag Report, an award-winning Substack newsletter.

The Lead-Lag Report sets out to provide long-term investors with detailed strategic analysis and tactical investment opportunities. It is especially focused on helping investors navigate risk-on/risk-off dynamics in an era of elevated market volatility.

“I come from a naturally sceptical place when it comes to pretty much everything,” he tells OPTO Sessions.

One aspect of the stock market about which Gayed is especially sceptical is the predominance of large-cap US technology stocks.

Historically, he explains, the annualised returns of the S&P 500 tend to be greater under Democratic presidents than Republican presidents. Underlying this is a difference in the sectors that tend to outperform under either party: tech stocks typically benefit under Democratic regimes, whereas ‘real world’ sectors like energy flourish under Republican administrations.

“I come from a naturally sceptical place when it comes to pretty much everything.”

“That’s actually consistent with congressional trades. Those in Congress that are Democrats tend to trade and play with the tech sector more,” says Gayed.

What Could Trump Mean for Tech?

Gayed believes that the market is starting to respond to the increasing chances of a Donald Trump win in November’s presidential election.

“Nvidia [NVDA] has been getting a lot of attention,” he says. Since closing at an all-time high on 20 June, Nvidia’s share price has fallen 16.2% in approximately one month.

Part of this decline stems from the possibility of a Trump win and the geopolitical connotations that would have for the semiconductor industry. Shares in Taiwan Semiconductor Manufacturing Company [TSM] fell 8% on 17 June after Trump said that Taiwan should pay the US for its defence. Nvidia fell 6.6% on the same day.

At a minimum, Gayed feels that a Trump presidency would imply a re-calibration of the market concentration in the tech sector.

“If Trump is going to ride the wave of economic populism, that means you need to have a spreading out of economic prosperity, which means you have to somehow, on a relative basis, hurt the tech sector.

“It seems plausible to me that a Trump presidency could result in tech being a laggard. That doesn’t mean it has to go down; it just means that it’s not going to be the only place to be, like it has been the last four years.”

Could AI Mania Kill Big Tech?

“Early last year as the Nvidia hype was taking place, I said that we’ll look back on this AI mania as the blow-off top for US large-cap dominance. I still maintain that view.”

Gayed observes that US large-cap stocks have been outperforming small-caps and international competitors since 2011. Throughout that time, tech stocks have continued to rise, despite fundamental ratios that confound value investors.

“That relative ratio at some point gets so stretched that you need some narrative to really get it to the extreme. I think that AI happens to be that narrative.”

The narrative draws all investors into the same trades: Gayed emphasises that it is impossible to be bearish on Nvidia and hold a position in the S&P 500 because of Nvidia’s outsized representation in the index.

“When everybody’s in the same position — knowingly or unknowingly, simply because of how large the position is in most portfolios — that over-crowdedness tends to mark a blow-off top. That’s clearly the story of what’s going on with AI”

Given that both US politics and market dynamics could be ushering in the end of the big tech bull market, the key question is where investors should put their money instead.

“If it’s purely, ‘I’m afraid of tech, so I’ll go into something else which is not tech’, it could work for a moment in time, but it’s not likely to be another long-lasting situation.”

Safe Havens Overseas?

Having underperformed the S&P 500 for years, international markets may be due their day in the sun. However, for Gayed, it’s a question of sequencing — and, especially, what happens to the US dollar.

“I’d argue that you need to have large-cap tech weakened for the dollar to weaken.”

“You need to have the dollar weakened in a meaningful way for there to be a tailwind for international.”

This is, however, deeply intertwined with the strength of large-cap tech stocks. Because the largest technology companies are all US-based, as long as they dominate, foreign capital will pour into the country and strengthen the dollar.

“So, I’d argue that you need to have large-cap tech weakened for the dollar to weaken,” says Gayed.

China could be a viable international market; Gayed thinks that the country’s economic problems could have passed an inflection point. The central bank is taking steps that will give it greater ability to inject liquidity, which Gayed believes will help stimulate economic growth.

He also highlights that, relative to the size of its economy, China is “the most under-owned part of the world” in investors’ portfolios.

“A lot of people have just been nervous about investing in China,” he says. “A lot of financial advisors don’t want to allocate to China, they don’t even have funds in their portfolios that have the word China in them.”

As a contrarian play, Gayed feels that there could be value in some Chinese stocks — highlighting Alibaba [BABA] as one example.

While many investors who have been reluctant to invest in China have allocated to India instead, Gayed prefers China largely because of the over-concentration of the Indian stock market in its financial sector.

“Banks are not supposed to be the high-flyers,” he says.