💰 5 Fact Friday: Will The "Everything" Bubble Explode?

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Hey Money Maniacs,

Welcome back! Last week, you voted on whether Nvidia could continue its rapid rise.

The results were close, but our community sees “sustainable growth” as more likely than a “plateau” or “bubble burst.” Whether they realize it or not, investors in S&P 500 ETFs are counting on this too—since Nvidia makes up 6.6% of the index.

Now, let’s get into this week’s biggest stories in the world of money. Today’s issue covers:

1. The CPI Does It Again 🚀

2. Powell Preaches Patience 🕰️

3. Apple’s AI-Powered Comeback 💪

4. Harry Dent's Dire Warning 💥

5. The Incentives Behind Stock Splits 👀

1. The CPI Does It Again 🚀

For the second straight month, the Consumer Price Index (CPI) report offered investors a breath of fresh air.

The latest CPI showed no monthly increase and an annual rise of just 3.3%, both lower than expected.

Here's the breakdown:

• Energy prices fell by 2%, with gas prices dropping 3.6%.

• Food prices barely ticked up, rising by only 0.1%.

• Shelter costs jumped 0.4% (to 5.4% annually), as housing remains a hot market.

Overall, this marked the lowest CPI reading in nearly two years.

With renewed hope in the battle against inflation, investors celebrated the improved odds that the Federal Reserve could cut rates as soon as September.

The S&P 500 and Nasdaq ripped to new all-time highs, and small caps rallied nearly 3%. The bond market also cheered, with bond prices surging and yields plunging.

So, what does this mean for the Fed's next move?

While the Federal Reserve primarily uses a different inflation measure (Personal Consumption Expenditures), the CPI still plays a role in its policy decisions. Chairman Jerome Powell even conceded, “Readings like today's CPI [are] a step in the right direction."

2. Powell Preaches Patience 🕰️

Just hours after the CPI report dropped, the FOMC concluded its latest two-day rate-setting meeting with a press conference. Chairman Jerome Powell announced that the Fed would hold rates steady—for the 7th straight time—at 5.25% to 5.5%.

Despite the "no move is our move" approach, the Fed did reveal 3 key signals:

1. Change in Language: Powell used new phrasing about the inflation trajectory, opting for “modest further progress” instead of “lack of further progress.”

2. Rate Cut Forecast: The Fed's updated forecast now implies only one quarter-point cut by the end of 2024, down from the three quarter-point cuts expected just three months ago.

3. Inflation Target: The Fed revised its year-end inflation target from 2.6% to 2.8%.

These adjustments paint a picture of a patient Fed—uninfluenced by recent rate cuts from the Bank of Canada and the European Central Bank.

Looking ahead, the committee projects five rate cuts totaling 1.25% through 2025. This would bring the federal funds rate down to 4.0% to 4.25% by the end of next year.

Unsurprisingly, traders are already more optimistic than the Fed, currently pricing in two cuts by year-end. But remember, these are largely the same market participants betting on six rate cuts back in January.

If this year’s yo-yo of expectations has taught us anything, it’s that markets tend to overreact—both positively and negatively—to small signals.

For now, it’s clear that inflation is cooling, but at a slower-than-expected pace. Cuts are coming, but I'd be hesitant to book the win just yet.

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3. Apple’s AI-Powered Comeback 💪

Despite its status as a member of the Magnificent 7, Apple had been languishing.

The iEverything maker has seen phone sales slow and revenue flatline for two years. While underperforming the S&P 500, the company slowly slipped to 3rd place on the leaderboard.

But thanks to a triumphant Worldwide Developers Conference (WWDC) on Monday, Apple is back on top as America’s largest public company.

At WWDC, Apple unveiled a slew of new features:

• Transfer cash by tapping iPhones

• Schedule messages (finally)

• Better home screen customization options

• An all-in-one password manager

• iPhone screen mirroring (drag and drop between your iPhone and Mac)

• A dynamic calculator app on the iPad

• And much more!

The star of the show? “Apple Intelligence,” the AI announcement the world was waiting for.

Apple’s newest platform, available only on iPhone 15 models, integrates AI into apps like Siri, Photos, and Maps, offering:

• AI-powered summarization for articles, emails, and messages

• Tools for suggesting email responses

• Transcription across Mail, Messenger, and Notes

• A more context-aware approach for Siri

Initially, shares dropped 2% following the announcement. But after analysts digested the news, Apple experienced its best three-day run since 2020, adding $215 billion to its market cap on Tuesday alone—a record one-day gain.

Bull Case

Analysts believe these AI enhancements could spark a massive upgrade cycle, boosting sales and earnings. According to Raymond James analyst Srini Pajjuri, Apple’s earnings per share could increase by 20 cents for every 1% of iPhones upgraded.

Bear Case

Critics note that Apple outsourced its long overdue Siri upgrade to OpenAI's ChatGPT. Some see this as a concerning lack of innovation and execution. They also fear that surface-level app integration won’t entice consumers to pay for Apple’s hefty price tags, especially when free AI alternatives exist.

What’s your take?

4. Harry Dent’s Dire Warning 💥

Economist Harry Dent, famous for nailing Japan’s 1989 recession and the dot-com bubble, is back with another ominous forecast.

According to Dent, the “everything” bubble—pumped up by unprecedented government stimulus—is set to explode.

Dent's prediction? Brace for impact...

He sees the S&P 500 crashing by 86% and the Nasdaq plummeting by 92%. Nvidia could nosedive by 98%. Even the real estate market isn’t safe, with housing prices potentially dropping back to 2012 levels.

What’s fueling this bleak outlook?

Dent points to the trillions in federal funds injected into the economy during the pandemic.

This artificial boost, he argues, caused Americans to bid up prices on assets, creating a precarious bubble. Since this bubble has been expanding for 14 years—far longer than the typical 5 to 6-year cycle—he expects the corresponding crash to be that much more severe.

Unfortunately, there’s some validity here. Government spending has been off the charts, and let’s face it, politicians rarely win elections on promises of fiscal restraint.

However, it wouldn’t be the first time there was cause for concern in the stock market.

Despite our challenges, the U.S. remains the best place to invest. America has deep, liquid financial markets, a stable government, a strong currency, innovative companies, and reasonable demographics. Invest elsewhere with caution.

Remember: pessimists get to be right, but optimists get to be rich. Choose your own adventure, maniacs.

5. The Incentives Behind Stock Splits 👀

Lately, it seems like everyone’s getting in on the stock split action.

Nvidia just completed a 10-for-1 stock split, Chipotle announced a 50-for-1, and Broadcom followed with a 10-for-1. Even Virgin Galactic joined the party, but with a twist: a 1-for-20 reverse split to stay on the New York Stock Exchange (NYSE).

What’s the big deal?

Stock splits don’t change anything fundamental. A $1,000 stock that performs a 10-for-1 split should become a $100 stock. Instead of owning x shares pre-split, you own 10x shares post-split.

However, your ownership stake in the company remains the same. You own the same slice of the pie—just divided into smaller pieces.

So, if nothing changes, why do companies bother?

1) Stock Exchanges

The NYSE requires stocks to trade above $1 to avoid being delisted.

At $0.73 per share, Virgin Galactic ($SPCE) is performing a 1-for-20 reverse split in an attempt to artificially boost its share price by 20x. Unfortunately, the stock traded down 14% on the news—meaning the company will now see only a ~17x change in price upon execution of the split.

A stock split can also pave the way for index inclusion.

Some have speculated that Nvidia’s recent split set it up to join the Dow Jones Industrial Average.

The Dow is a price-weighted index, meaning Nvidia’s previous $1,200 share price would have had a commanding influence. Now, with its more reasonable ~$130 share price, it’s a more viable candidate.

2) Price Psychology

Most, but not all, stocks are available as fractional shares. This means that investors don’t have to buy a full stock to begin investing.

For example, instead of putting up $3,265 for a single share of Chipotle, you could buy $500 worth and own 0.15 shares.

Perhaps not all investors realize this. Or, perhaps a lower stock price simply feels more approachable.

Whatever the reason, companies that perform stock splits tend to outperform. These stocks average 25% returns in the 12 months post-split compared to 12% for the S&P 500.

That being said, selection bias might be at play here.

Only the highest-performing companies see their share prices appreciate enough to call for a split. So they may simply be firing on all cylinders, which would explain their outperformance—not the splitting itself.

Regardless, executive compensation is often tied to share price performance. So the incentives are clear, and if it works it works. 🤷

That’s all for today! For more insights, follow me on Instagram, Twitter, and at TheMoneyManiac.com.

Also, I’d love to hear your feedback. So please reply with comments – I read everything.

Until next time,
Daniel

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.