Jamie Dimon, a legend on Wall Street, gave some pretty cautious commentary a few days ago in a sit-down with CNBC, commenting on global and fiscal risks that the market may very well be underestimating. Indeed, given the escalating tensions in the Middle East and the latest ascent in the price of oil, it’s hard to disagree with the JPMorgan (NYSE:JPM | JPM Price Prediction) veteran. But just because he’d not be a personal buyer of U.S. stocks or long-dated Treasury securities in this market doesn’t mean you should hit the sell button.
Are there a lot of risks that could derail this latest market rally? Most definitely. The situation in the Middle East is not going well, to say the least, and the oil markets are responding.
Jamie Dimon is right about the risks facing this market
As oil rises and pockets of overvaluation within the AI trade begin to unwind, it certainly feels like the stage is set for the next big market spill. Valuations still seem quite frothy, and the lists of risks outlined by Mr. Dimon, I think, are very much worth careful consideration before making a move.
Moving ahead, it feels like stocks are about to roll over, but for long-term thinkers, I view any indiscriminate slide, like the one we had on Thursday, as more of an opportunity to do some buying if your cash hoard has been building up and you haven’t been tempted by anything in recent months.
At the end of the day, Mr. Dimon tends to sound more cautious than not. After all, he’s the top boss of JPMorgan, and he’s not exactly looking to take big swings or big risks on AI or anything else.
When it comes to market gurus, I take what they have to say with a grain of salt because, at the end of the day, the market will continue to act in unpredictable ways. And while markets are starting to feel a bit of pain amid rising tensions in the Middle East and increased chances of interest rate hikes in the second half, I do think that the AI revolution is the theme that matters most for investors willing to stick around for at least the next few years.
Jamie Dimon’s comments might be scary to some. But a little caution never hurt
So, in short, Mr. Dimon’s latest comments might be frightening to some retail investors. And while I do think many investors are far too willing to pay a premium price for a wide range of stocks with less consideration for the downside risks, I also view pockets of value out there for investors who are looking for the productivity benefits from the AI revolution to come in steadily over the next three years. At the end of the day, bankers are supposed to think about managing risks.
While Mr. Dimon’s cautious tone is worth keeping in mind, I wouldn’t necessarily look for the start of a bear market. The man didn’t even remark on one coming. At the end of the day, it feels like markets are already in the process of digesting the heightened risks, especially on the geopolitical front.
As oil, fiscal deficits, and rates climb, investors might not like the environment we find ourselves in come the end of the year. Either way, panicking and emotion-driven investing never pays off.
Alphabet stock might be a deep-value outlier
Right now, I think margin of safety isn’t all too hard to find when you look at a name like Alphabet (NASDAQ:GOOG), which cratered after earnings. The massive cloud backlog wasn’t enough to convince investors to forgive the swelling CapEx.
With shares trading at around 24.0 times forward price-to-earnings (P/E), I think the behemoth AI lab is going for a massive discount, especially as the backlog continues to swell and the firm takes more control over the AI stack, from models to infrastructure and hardware (TPUs and the reported “Frozen v2” chip) to applications (Generative UX looks intriguing).
Perhaps there’s a reason Warren Buffett admitted it was him who initiated the purchase for Berkshire Hathaway (NYSE:BRK.B). It is a very Buffett-esque business with a remarkable track record and, odds are, the CapEx won’t be for nothing. While Mr. Dimon might be right about the market risks, I still think there are margins of safety in individual names for those willing to look.
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