Adam Johnson: AI Boom, Not Bubble. Why This Bull Market Still Has Room to Run

Key Concepts

Corporate America Performance: Strong recent quarterly earnings reports, double-digit growth, and near-record profit margins.
Economic Growth: GDP growing at nearly 4%, exceeding expectations.
Unemployment: Low at 4.2%, with consistent job creation (50,000 per month).
Stimulus Programs:
- AI Hyperscaler Expenditures: Increasing from $350 billion to $420 billion.
- Foreign Direct Investment (FDI): $17 trillion in announced deals since inauguration day.
Business-Friendly Washington: Lower tax rates, accelerated depreciation, deregulation.
Seasonal Strength: Historically strong period for markets towards year-end.
AI Bubble Concerns: Skepticism regarding valuations and sustainability of AI investments.
Valuation Metrics: NASDAQ at 35 times earnings vs. S&P 500 at 23 times earnings. Comparison to historical bubble valuations (85-90 times earnings).
Stock-Specific Analysis: Differentiating between individual AI companies (e.g., Palantir vs. Nvidia).
Market Volatility: Frequent 3-4% pullbacks within an overall uptrend.
"Buy the Dip" Strategy: Viable in a bull market with strong underlying economic fundamentals.
Inflation Risk: Potential for reacceleration as a major market concern.
Interest Rates: Impact of higher rates on stock valuations.
Tariff Legality: Supreme Court ruling on tariffs as a potential market risk.
K-Shaped Economy: Discrepancy between financial asset performance and broader economic pressures.
Price Makers vs. Price Takers: Distinction between companies that set prices and those that accept market prices.
AI Productivity Gains: Potential for AI to drive efficiency and push back against inflation.
Capital Expenditure (CapEx) Cycles: Investment phases followed by periods of reaping rewards.
Moats and Pricing Power: Importance of competitive advantages and pricing ability for AI companies.
American Ingenuity: Focus on innovative companies and technologies.
Logistics and Automation: AI and robotics in supply chain and distribution.
Air Taxi Drones: Emerging technology for urban and airport transit.
GE Vernova (GEV): Innovative energy generation technology derived from jet engine principles.
Risk Management and Discipline: Setting price targets and selling portions of holdings.
Portfolio Management: Maintaining a dynamic portfolio, avoiding stagnation.

Summary

Positive Market Outlook and Economic Strength

Adam Johnson, portfolio manager of the Bullseye American Ingenuity Fund, expresses a strongly bullish outlook, citing robust corporate performance and economic growth as primary drivers. He notes that recent quarterly earnings reports have been among the best in years, with corporate America demonstrating strong performance. The economy is growing at nearly 4% GDP, significantly exceeding prior expectations. Unemployment remains low at 4.2%, near historical lows, with an average of 50,000 jobs created per month.

Johnson identifies two major stimulus programs:

Artificial Intelligence (AI) Hyperscaler Expenditures: These are projected to increase from $350 billion in the current year to $420 billion next year, representing a significant investment in technology infrastructure.
Foreign Direct Investment (FDI): Approximately $17 trillion in announced deals have entered the U.S. since inauguration day, equivalent to half of GDP.

These factors, combined with a business-friendly political environment characterized by lower tax rates, accelerated depreciation, and deregulation, create a positive backdrop for markets. Johnson confirms he has been actively buying on dips and is comfortable being fully invested, anticipating market upside.

Addressing Skepticism on FDI and Economic Data

Regarding skepticism about the realization of FDI commitments, Johnson acknowledges that while some investments are long-term (3-5 years), the trend is already showing tangible results with factories relocating and jobs being created. He advocates for taking these commitments at face value, similar to personal commitments like marriage, and believes the strong GDP growth is evidence of this capital inflow. He contrasts the current positive economic data with earlier predictions of recession, noting that Goldman Sachs had predicted a 30% recession probability, which has not materialized.

AI Bubble Concerns and Valuation Analysis

Johnson addresses the prevalent fear of an "AI bubble" by dissecting valuation and structure. He argues that the NASDAQ, a proxy for tech and AI, is trading at 35 times earnings, which is significantly lower than historical bubble valuations (85-90 times earnings during the dot-com bubble and pre-2008 financial crisis). He differentiates between individual AI stocks, stating he would not invest in Palantir due to its extreme valuation (300 times earnings, 100 times sales). Conversely, he considers Nvidia to be "quite cheap" given its projected 75% earnings growth at 32 times earnings, which is cheaper than the NASDAQ average and justified by its growth rate compared to the S&P 500's 12-13%. He emphasizes the need for stock-specific analysis rather than broad generalizations about AI.

Market Volatility and "Buy the Dip" Strategy

Johnson explains his approach to market volatility, noting that since August 1st, the NASDAQ has seen 17% growth with seven pullbacks of 3-4% along the way. He views these pullbacks as opportunities, stating that in an uptrend and bull market, "pullbacks remain viable." He asserts that the "buy the dip" strategy has been effective, having worked seven times previously, and is likely to continue given the strong economic fundamentals and accommodative policies. He advises against trying to "outsmart the market" and to "don't fight the trend."

Discounting Washington's Impact and Inflation Risk

Johnson expresses a degree of skepticism towards the direct impact of Washington D.C. politics on investment decisions, citing Winston Churchill's observation that America eventually gets it right after trying everything else. He believes corporate America and private citizens drive progress despite political infighting. He dismisses the government shutdown as a significant market mover.

His primary concern for the market is the potential for inflation to reaccelerate. He explains that this would force the Federal Reserve to reverse its course on interest rates, leading to higher rates. Higher interest rates negatively impact stock valuations by increasing the discount rate for future earnings, making current stocks worth less.

A secondary concern is the legality of tariffs, as a Supreme Court ruling against them could lead to increased government bond issuance to cover deficits, thus driving up rates.

AI's Role in Productivity and Pricing Power

Johnson discusses the "K-shaped economy" where financial assets perform well while others feel economic pressure. He highlights that technology companies, as "price makers," have an advantage over "price takers" in managing inflation. He believes AI holds the promise of increased productivity, which could push back against inflation by enabling companies to do more with less. He uses Amazon's potential for automation in warehouses as an example, suggesting that cost savings could be passed on to consumers or investors.

He addresses the monetization of AI, noting that companies like ChatGPT are investing heavily in growth rather than immediate break-even. He draws a parallel to Meta's past investment in the metaverse, where reducing CapEx led to an earnings surge. He anticipates that as AI companies move past their heavy investment cycles, earnings will accelerate.

American Ingenuity and Specific Investment Examples

Johnson's investment thesis centers on "American Ingenuity." He identifies companies that are leveraging technology and innovation across various sectors.

Logistics and Automation:
- Symbiotic (SYM): A company converting Walmart's distribution facilities into robotic operations, demonstrating significant growth.
- GXO Logistics: A spin-off from XPO Logistics, also involved in logistics and automation.
- Salesforce Inc. (CRM): Aggressively using AI to enhance customer relationship management and drive client sales, with AI cited as a reason for recent earnings growth.
Emerging Technologies:
- Joby Aviation (JOY): Developing and operating air taxi drones capable of carrying passengers and luggage, with significant technological advancements in speed, range, and recharge time. Partners include Intel, South Korea Telecom, Uber, and Delta Airlines. The goal is to improve airport transit convenience.
- GE Vernova (GEV): A spin-off from GE, utilizing jet engine technology to generate electricity on-site using natural gas, a solution for powering data centers. This is presented as a prime example of American ingenuity in the energy sector.

Johnson also mentions former oil trader insights for value plays like EOG Resources and Energy Transfer, but his growth-oriented "American Ingenuity" portfolio focuses on companies like GE Vernova. He avoids quantum computing and small nuclear reactor companies due to their long development cycles and lack of near-term revenue.

Risk Management and Portfolio Dynamics

Johnson emphasizes discipline and risk management in his investment approach. He sets target prices for stocks and sells a third of his position when that target is reached, believing that "you're only rational once." He then re-evaluates and sets new targets, allowing for portfolio growth and the ability to reinvest in new opportunities. He uses Nvidia as an example of selling portions of a successful investment to maintain portfolio balance and cash for future discoveries. He likens a healthy portfolio to a flowing river rather than a stagnant pond.