Why Markets Can’t Price AI

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1:36Tom Lee:Today's number? 135 million. That's how many people watched Bad Bunny's Super Bowl halftime show. The president was not happy with the performance. He said the dancing was, quote, disgusting, especially for young children. That is a sharp reversal from his previous views on what's disgusting for young children. Money market's mad. If money is evil, then that building is hell.

2:08Tom Lee:Welcome to Prof. G Markets. I'm Ed Elson. It is February 10th. Let's check in on yesterday's market vitals. The S &P 500 and Nasdaq climbed as the Dow hit its second consecutive record close. Meanwhile, the dollar fell. Gold climbed back above$5 ,000 and Bitcoin was roughly flat after its drawdown last week. More on that in a moment. Okay, what else is happening? It's been a harrowing week for the tech sector. Amazon is down 15 % over the past five days after spooking investors with a nearly 60 % jump in its 2026 CapEx outlook. The announcement came amid a brutal tech sell-off as new tools from Anthropic ignited fears that AI could kill the software industry.

2:54Tom Lee:All told, the sell-off wiped out over$1 trillion in market value of tech stocks. However, markets rallied on Friday as some traders bought the dip. Stocks continued their rally yesterday as Google raised $20 billion in a bond offering to fund its AI spending. Still, Amazon fell deeper into the red. Okay, here to discuss what's happening with Amazon and the tech markets at large, we're speaking with pod favorite Robert Armstrong, US financial commentator for the Financial Times, author of the Unhedged newsletter and co-host of the Unhedged podcast. Rob, welcome back to Prof.G Markets. Great to be here.

3:30Tom Lee:Let's get right to it. Yeah. We'll start with Amazon. Amazon reported earnings. They basically met revenue expectations, basically met on earnings. It was a little bit of a miss.

3:43Robert Armstrong:Yes.

3:43Tom Lee:But the big news was they decided to increase their CapEx to$200 billion in 2026, up more than 50 % from last year, $50 billion more than Wall Street expected. And now Amazon is essentially in free fall. Let's just start with your reactions to what happened to Amazon and the markets reaction.

4:04Robert Armstrong:Well, let's just be clear. The amounts of money these companies are now talking about, Amazon, Google, Microsoft, Meta, are unbelievable, right? I mean, there's numbers being thrown around, like, you know, the amount of spending as a percentage of GDP somebody was taking today is more than was spent on the transcontinental railroads. You know, it's like, I mean, I don't know what percentage of GDP the Great Pyramid of Giza was, but like this is like titanic amounts of money. And I think the anxiety we've seen building for a number of months here, what is the ROI on these sums, hundreds of billions of dollars, the amount of revenue you're going to have to generate to make that a project comparable in profitability to the historical business of an Amazon or a Meta or a Google or a Microsoft are just staggering.

5:06Robert Armstrong:And so are these companies becoming structurally less profitable in the AI era? Maybe. And I think that's what Amazon is down 15 % lower than it was a few days ago. I think that is what the market is thinking. These may be great AI companies in their next iteration, but AI might not be as good a business as their old business was. and there's no way of going back. You can't just sit by the sideline either.

5:40Tom Lee:Talk a bit about why has the market decided that? Because I look at what's happened with Amazon here. I also look at the reaction to Google where Google announced that they were going to double their spending and then the shares fell a little bit, but not really. And then again, rebounded. It was a very different reaction. And even weirdly, Metas went up. Metas went up, exactly. And so there are different reactions. I mean, it feels like we're trying to, or at least I'm trying to understand, which is an impossible task, what is the market really thinking? But there are a lot of contradictions happening here.

6:14Tom Lee:As you say, Meta announces this gigantic spending plan, shares go up. Amazon does the similar thing. They basically all do the same thing. Amazon shares go down. Meanwhile, there's this story happening in AI, which is Anthropic, comes out with these incredible tools, and then everyone decides that's the future. it's not going to be the legacy software companies like salesforce and service service now and the rest of them which again seems to be a little bit of a contradiction because it's like is ai going to be massively transformative then okay maybe the spending is a good thing or maybe it isn't going to be transformative and in which case the spending is a waste of money where does the market stand here?

6:55Robert Armstrong:Okay. I think this is a quote jumps to mind, which is what William Golding, who is a novelist and screenwriter said about Hollywood. You probably know this one. He said, nobody knows anything. And what he meant by that was that you don't know, you make movies and you don't know if you've made a good movie or not until an audience sits in front of it and likes it or doesn't like it and tells their friends and people start buying the tickets. It's just a crap shoot until you're in front of the audience. You don't know. And there is a flavor of that here. We know this is a powerful technology, but we don't know what the business structure is going to look like.

7:34Robert Armstrong:We don't know how deep the competitive moats around good AI businesses are. And of course, competitive moats are what determines the size of your returns. We don't know how commoditized is going to be. And so it feels like the market is kind of, uh, flapping around looking for some kind of narrative it can cling to because we just can't know at this point. Do you know what I mean? So like software companies, this route in business software companies was a perfect example. Like all those business software companies are not going to get crushed by AI. Some will incorporate it. Some will get crushed.

8:18Robert Armstrong:Some will adopt. There's a lot more to running a business software company than just writing code. There's distribution and customer relationships and all of this stuff. So do we know who's going to be steamrolled and who's going to adopt? No. Yes. And we're just, it's guesses and it's volatility and it's one narrative takes control for one day and then the next narrative. So I think, you know, the contradictions are not going to go away. Over the long run, markets will price this, but it's really struggling to do it right now. 100%.

8:56Tom Lee:I would just add, I mean, I think that's exactly right. No one really knows what's going on, hence why we're seeing all of this volatility. And in those moments, it does seem that the best thing you could do as an investor is just go back to square one and go back to fundamentals. go back to the fundamentals of valuation. And, you know, I'm just looking at the multiple on Amazon right now, trading at, it was 29 times earnings earlier in the day. We've bounced back up a little bit to 30 times earnings. But let's compare that to Walmart. Walmart is trading at 47 times earnings. Let's compare this to Costco.

9:30Tom Lee:Costco's trading at 54 times earnings. Unbelievable disparity here between Amazon, the future of retail, and then Walmart, the past of retail.

9:40Robert Armstrong:retail. But you know, and first of all, Walmart, we should just say, and Costco are brilliantly managed companies. Like it's to say those are boring old grocers really misses it. You know, I think Walmart's management has been courageous about kind of grasping the online nettle and making hard decisions about accepting lower margins in return for, you know, higher revenues and all this stuff. But the point is you just know more about Walmart's future than you do know about Amazon's future. Right. Right. It is it is easier to predict. And that's why that's the difference in multiple right there is it's an uncertainty.

10:20Robert Armstrong:It's a certainty premium for the Walmarts and the Costco's and an uncertainty premium for the Amazon's. And look, all of these staple stocks, even the those are the two best staples companies in the world. But like all these like the crappy staple stocks like Campbell's soup. Those are doing well too. And those aren't growing at all. There's all these kind of old school consumer goods, uh, companies that, you know, they can't get any price and they're not growing at all, but they're rallying this year because at least, you know, they'll be around, right? I mean, you know, people are still going to use trash bags.

10:57Robert Armstrong:Exactly.

10:58Tom Lee:It seems that that is, I mean, it's astounding the amount of money investors are willing to pay right now for certainty, for some semblance of security and safety. And it's interesting that this is the kind of stuff that investors have decided is safe. We could say the same thing about gold. For whatever reason, we've decided that gold this year is a safer thing to invest in than Amazon. You wrote in your unhedged newsletter, you said, this isn't just a tech sell-off. You said, quote, the market is undergoing a structural shift. Is this kind of what you were talking about?

11:33Robert Armstrong:Yeah, it is exactly. So there was a time, I mean, the narrative of a year ago, even six months ago was tech is kind of everything. And going with that narrative has worked brilliantly for investors. But all of a sudden people are interested in things like not just consumer staples, but energy, industrials, you know, kind of solid, steady businesses that have been neglected and now are, you know, they're not, none of them are very cheap, but they're cheaper than some of the growth stocks have been. And they offer you more certainty. I think, you know, international stocks continue to appeal for this same reason.

12:11Robert Armstrong:You know, you buy a European or UK index, you know, you're getting banks, industrials, miners, you know, basic stuff. And I think you're exactly right. There is a tremendous premium for predictability and certainty right now. And that's a big part of this regime change.

12:30Tom Lee:All right, Rob Armstrong, US Financial Commentator for the Financial Times. Rob, really appreciate it. Thank you as always.

12:36Robert Armstrong:Anytime. After the break, Bitcoin takes a fall.

12:42Tom Lee:And for even more markets insights, you can subscribe to my weekly newsletter, simply put, at edwardelson.substack.com.

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15:44Tom Lee:We're back with Prof G Markets. Bitcoin just suffered its worst two-week collapse in nearly three years. It's fallen more than 50 % from its October peak, briefly hitting a low of$60 ,000 on Friday. It finished the week with a sharp rebound to$70 ,000. But all told, Bitcoin is down 30 % over the past year, erasing all of its gains since Trump's re-election. Here to explain what is going on with Bitcoin, We are speaking with our friend Tom Lee, Chief Investment Officer of Fundstrat Capital. Tom, thanks for joining us on ProfG Markets. Great to see you. Great to see you. So Bitcoin is seeing one of its largest crashes in a few years, hit$60 ,000, then it came back up.

16:34Tom Lee:Let's just start with your kind of high-level thoughts on what's happening right now.

16:38Ed Elson:Well, you know, Bitcoin has been in a drawdown really since October 10th. And we know that on October 10th, there was a price shock. Then that led to one of the largest ever deleveraging events. And so the industry has been crippled since because balance sheets have shrunk. About a third of the industry's market makers went away. And crypto sentiment, of course, has turned really negative because about at least two million accounts got wiped out during that mini crash. And so the industry has been limping along. And I think then a few things happened earlier this year that sort of triggered another cascade of not necessarily deleveraging shock, but essentially what looks like capitulation.

17:28Ed Elson:The first is that President Trump made a tweet about Greenland in January, and that triggered another cascade of liquidations because you had another price shock that happened over a weekend. And as we know, liquid markets will sell what they can over a weekend ahead of a broader market opening, and that was crypto. The second is that as markets became very leery about geopolitical tension, and then of course dollar weakness, but then it got magnified that we had a potentially new Fed chair coming in that looked that he could be quite hawkish. I think that led to a real rethink about how people want to be positioned.

18:17Ed Elson:And as you know, gold suddenly surged. And that gold surge became quite expensive for investors because gold has about a$30 trillion network value now. Gold surged almost 20 % in two days. That was a$6 trillion swing. Well, the entire crypto market is about$2 trillion. So gold made a very large bottle move over a weekend, which again could have triggered another set of margin calls for anyone short, especially gold and silver. And then crypto, of course, was really the source of funds. So I think in many ways, crypto still hasn't recovered from October 10th. And then we had what I consider some macro shocks that got people really interested in gold.