What market bifurcation would mean for U.S., corporate debts

May 26, 2023 at 10:06 a.m.

Yahoo Finance's Jared Blikre joins the Live Show to discuss how U.S. debt default is now riskier than corporate debt for the first time, the potential market impact in case of a debt default, and the expansion of stocks investing in AI.

Video Transcript

DIANE KING HALL: Tech stocks led by semiconductors are trouncing the rest of the market. Now, Thursday for the first time since the dotcom bubble bust two decades ago, the tech sector surged nearly 4% while the equal weighted S&P 500 finished in the red.

Lots of disparities popping up in this bifurcated market as we approach the debt ceiling X-date. We have here with us "Yahoo Finance's" Jared Blikre to break it all down.

JARED BLIKRE: That's right. And we have two major themes here. As you noted, we've had this incredible outperformance by NVIDIA and certain growth tech stocks, especially the mega caps. Meanwhile, we got the debt ceiling looming. We're going to tackle that in a second.

I just want to show you what's happening in the NASDAQ today. NVIDIA taking a little bit of a breather. But I'm going to put the market cap numbers here. NVIDIA approaching $1 trillion. Now, the fifth largest stock in the NASDAQ 100. And it's competing with Amazon now for the number four spot. I want to show you year-to-date just so we have a handle and can wrap our minds around what's been happening here. NVIDIA now, with 159% trouncing Meta, which is also up an impressive 111%.

Now, let me just put this in perspective. The market cap gains that we had yesterday, that was the third largest by any company in history. You have to look at Apple and Amazon back last year. They each gained about $191 billion in one day. But NVIDIA gaining $184 billion trouncing that Apple record from back in also 2022, Microsoft, and then Tesla gets a spot there as well.

So let me talk about the disparity that's popping up in terms of who's getting the hot money. This is the S&P 500 market cap weighted versus equal weighted. So market cap weighted means the bigger the company like NVIDIA, which is approaching $1 trillion, the greater the weighting they get. This line, the squiggly line down here, just shows you who's outperforming. Is it the market cap? Is it the big guys? Or is it the little guys all marching together?

We have the biggest disparity here, going back to the beginning of my data in 2003. And you go back, you might get some challenges from the dotcom area. And we can express this a number of ways. Here's the NASDAQ 100 versus the NASDAQ composite. A hundred stocks versus maybe 3,000 stocks. And you can see we got a little bit of a bump up here. This goes back also what, 30, 40 years. But the dotcom bubble crash to show you how big these disparities can get, that was much bigger.

So things can definitely get more bubbly. But what I want to focus now on is the debt ceiling. Because US debt is now riskier than corporate debt for the first time ever says Bank of America going back in their data to 1986. This shows you the investment grade. This shows you the investment grade yield minus the US yield. And that would be on US government debt, which is supposed to be risk-free.

Well, now, it's in negative territory. And that's just because of the mechanics surrounding the debt ceiling. We now have four month T-bills yielding 6%. There are some bills that are right around the expiration date coming here that people just don't want. So if we fail to get a debt ceiling resolution, probably easily head down another 5% to 10%. We could see 3,800 in the S&P 500. Even if we get a resolution, guess what, the Treasury has to fill its coffers back up. Maybe $500 billion to a trillion dollars between US and Europe and tightening throughout the rest of the year.

So all of this points to increased headwinds for a lot of these stock moves. So can the huge AI-fueled bubble or is it bubble-ish that we're watching right now and NVIDIA continue? Well, it depends on what happens with the debt ceiling. But a failure to pass probably means an immediate 5% to 10% wipe out in stocks.

JULIE HYMAN: And then if we do get the Federal Reserve raising rates on June 14--

JARED BLIKRE: Well, you want to add another monkey in the wrench?

DIANE KING HALL: Yes.

JULIE HYMAN: That's under consideration.

JARED BLIKRE: We got flies in the Olympics doing backstroke here.

[LAUGHING]

DIANE KING HALL: All day now.

JULIE HYMAN: Thanks, Jared.

DIANE KING HALL: Thank you, Jared.

JARED BLIKRE: Thank you.