By Tim Courtney, Chief Investment Officer
The past few months have demonstrated how quickly market sentiment can shift and how that change can impact prices in ways that are difficult to explain in the moment. We have gone through a period where enthusiasm around certain themes, like AI pushed valuations higher at a rapid pace.1 Then almost just as quickly, that enthusiasm faded.2 These kinds of moves remind us that a lot of what happens day to day in financial markets reflects emotion in the forms of optimism and pessimism rather than meaningful changes in business fundamentals.
To illustrate this, in early September we prepared a slide using Oracle as an example of how certain tech stocks had behaved between the dot.com bubble and 2025. Within less than a week, the slide was no longer relevant because Oracle’s stock surged 36% in a single day, adding about $244 billion in market value—its best day since 1992.3 That increase reflected how strongly investors were optimistically linking Oracle to the AI buildout and their belief that the associated spending would continue at a rapid pace. But throughout October and November, the stock gave back all of these gains and returned to where it had started when we first created the slide.4
This price behavior aligns with how the AI story has been treated more broadly. Companies involved in different parts of AI development and infrastructure have been moving in tandem.5 Investors have grouped several related companies into a single AI-driven trade. For several years, these companies raised large amounts of capital at very low cost because interest rates were low and investors were willing to pay high prices for the equity.6
However, the questions about how AI can create the level of revenues needed to justify these investments are getting louder. The credit market is also beginning to show signs of AI fatigue.7 The concern has trickled over into equity trading sporadically, again using Oracle’s wild ride as an example.8 This is what we call noise—prices moving, sometimes dramatically, but without any information about what to expect from the future.9 Noise simply tells us how quickly sentiment can swing in either direction when investors react to a story that is still developing.
Although near-term price movements don’t provide us with any actionable information, a price scaled by a fundamental—sales, earnings, cash flows, dividends—can tell us something. A company’s cost of capital is the investor’s return.10 When a company can sell stock at very high prices relative to its fundamentals, its cost of raising capital is lower. That lower cost of capital translates into a lower expected return for the investor.
While we should be looking at prices scaled by company fundamentals to help make investment weighting decisions, the near-term price movements by themselves are more noise than information. If you have any questions about this, don’t hesitate to speak with your Exencial advisor.
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