Recent sharp volatility in the Nasdaq Composite (NASDAQINDEX: ^IXIC) index shouldn’t surprise experienced investors, because the stock market doesn’t move in a perfectly straight line over the long term. Markets will always be volatile.
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The key question is whether downside moves, such as a recent one-day dip of 5.5% that sent the Nasdaq briefly into correction territory, signal an extended period of weakness or a buying opportunity. I think the answer is the latter, but with qualifications.
Buy the dip?
First, try to discern the reasons for the dip. As ever, multiple causes are likely, but history and human nature suggest a consistent theme. Simply put, rapidly rising prices push investors to misallocate resources, leading to unproductive investment, which then triggers a correction when reality kicks in.
These “rising prices” can be a general increase in the price level (inflation), or they can be in asset classes (equities in the dot-com boom of the late 1990s, or commodities in the 2000s, or subprime mortgages in the great financial crisis).
And now, we are in an artificial intelligence infrastructure boom.
The AI investment boom
It’s no secret that hyperscaler investment in AI data center infrastructure has soared, as has investment in AI applications. In other words, the “rapidly rising prices” I referred to have induced me-too entrants into markets that they might not otherwise be comfortable in.
But don’t take my word as gospel; here’s what Warren Buffett said when asked about hyperscalers and Alphabet‘s (NASDAQ: GOOG) (NASDAQ: GOOGL) competitors. “They’re now playing a game, in many cases, or in some cases, where they’re playing a game they don’t want to play,” he said. For reference, Buffett initiated Berkshire Hathaway‘s position in Google’s owner, Alphabet.
The me-too game doesn’t just extend to companies overextending themselves with AI investment; it also comes from capital markets issuing credit to companies with questionable business models, and some that are struggling to cover their investments with cash flow. As you can see below, Alphabet can cover its capital investments with cash from operations; Oracle (NYSE: ORCL) and CoreWeave (NASDAQ: CRWV) can not.
