Dan Niles reveals why he prefers the 'Fantastic Four' and when the 'AI bubble' might pop

Published Sun, Mar 3 20246:34 PM EST

Hedge fund manager Dan Niles has named Nvidia , Meta , Microsoft and Amazon as his favorite stock picks thanks to their ability to boost earnings in 2024. Niles, who runs the Satori Fund , explained that stock performance for Big Tech companies over the past few years has primarily been driven by Federal Reserve policy rather than company earnings. He noted that in 2022, the so-called " Magnificent Seven " stocks fell 46% as the Fed aggressively raised interest rates — at the fastest pace since the 1970s. Then, in 2023, when the Fed paused rate hikes, those same stocks skyrocketed 111% as investors anticipated numerous rate cuts despite little change in their underlying earnings power. "If you look at the last three years … the move in technology stocks had nothing to do with earnings," Niles told CNBC's Street Signs Asia last week. "It's all been to do with the Fed." This year, however, Niles sees a divergence where earnings take on more importance for stock market performance. While shares of Apple , Tesla , and Alphabet have fallen this year on negative estimate revisions by analysts, Niles' four picks continue to see analysts raise forecasts. Specifically, he called out estimate increases at Nvidia, Meta, Microsoft, and Amazon thanks to their booming AI businesses. "Those names are being driven by earnings," Niles asserted. For the four stocks, analysts have raised EPS expectations for this year by 50% on average since the end of last year, according to FactSet data. Meanwhile, estimates have stayed nearly flat for Google, Tesla and Apple. The stocks have responded accordingly, with Nvidia up 60% year-to-date, Meta gaining over 35%, and Microsoft and Amazon also outperforming. When will the AI bubble pop? When asked if Nvidia's continued surge is reminiscent of past bubbles, Niles pushed back. He drew parallels between the launch of Netscape's web browser in 1994 and the launch of chatbot ChatGPT in late 2022 to argue that it's still early days in the current "AI bubble." The hedge fund manager noted that after Netscape went live with the first widely popular web browser in 1994, tech stocks and the overall Nasdaq Composite entered about 15 months of euphoria. From late 1994 through early 1996, the Nasdaq rose 47% while the S & P 500 gained 40% as investors grew excited about the internet's potential. Niles highlighted that a similar thing is happening today in response to ChatGPT and other AI technologies, with the Nasdaq up 42% since ChatGPT debuted in November 2022. However, Niles argued that the 1990s internet bubble took five more years after 1996 to reach peak valuations. The S & P 500 ultimately topped out up more than 200% from 1994 levels, while the Nasdaq hit a nearly 575% six-year gain at its early-2000 peak before the crash. "There's no way you can say this is a bubble from a valuation perspective, or from a time perspective, because it took five years for that internet bubble to build, and we're only one year and a quarter into the 'AI bubble' if you want to call it so," Niles added. "I think we have a lot more room to go."