RISKY BET: Expert warns AI’s $7T spending wave is getting dangerous

Key Concepts

• Market Correction: A temporary decline in stock prices, typically 5-7%, following a period of strong gains.
• Breadth Deterioration: A market condition where a few large-cap stocks are driving gains, while the majority of stocks are not participating.
• AI Bubble Concerns: Worries about an overvaluation of technology companies heavily involved in Artificial Intelligence.
• Capital Expenditures (CAPEX): Investments made by companies in physical assets like property, plant, and equipment.
• Commodities: Raw materials such as gold, silver, copper, and aluminum.
• Consumer Discretionary: Goods and services that consumers can choose to buy or not buy, such as luxury items.
• Staples: Essential goods and services that consumers need regardless of economic conditions, such as food and utilities.
• Earnings Expectations: Forecasts of a company's or sector's future profitability.
• Federal Reserve (Fed) Rate Cuts: Reductions in the benchmark interest rate by the central bank, intended to stimulate economic activity.
• Geopolitical Concerns: Worries about international political events and their potential impact on markets.
• World Cup Economic Boost: The potential positive economic impact of hosting major sporting events.

Market Performance and Recent Correction

The market has experienced a rough start, with futures showing declines: Dow down 205, S&P down 43, and Nasdaq down 223. This follows a rally on Friday where all three major indices were up more than half a percent. The Nasdaq has seen a 1.5% loss for November. A significant portion of the discussion revolves around worries over an "AI bubble."

Expert Analysis on Market Correction and AI Concerns

Victoria, Chief Market Strategist at Crossmark, views the recent correction as typical in a market with deteriorating breadth, where gains were led by tech names. She notes that this, combined with very bullish sentiment, often leads to a 5-7% correction, which is what has been observed. She believes this might be a "good reset" and that breadth is starting to return, with consumer discretionary names showing signs of life. While geopolitical and AI bubble concerns remain, she suggests a more "riv" (likely a typo for "risk-on" or "rally") market into year-end, characterizing the current movement as a regular correction.

Ryan agrees that concerns about AI might be overblown. He highlights that sentiment has become completely negative, which he considers a bullish sign. He points to the Federal Reserve likely cutting rates, making the environment stimulative. The recent rally has broadened out, with healthcare stocks up 7% and material and financial stocks also performing well. This spreading out is seen as heartening.

Liz Peek believes the broadening out of the market is warranted by strong earnings across sectors, which is a key focus for investors looking into next year. She sees catalysts for upgraded forecasts, including companies investing in the U.S.

AI Bubble and Capital Expenditures

A significant concern raised is the Capital Expenditures (CAPEX) related to AI. JPMorgan has reported seven trillion dollars in bond issuances linked to CAPEX. There are valid concerns about the circular elements of how this is being funded, with some companies having strong cash flow (like NVIDIA) while others may not. This is seen as a reason why the tech sector hasn't responded as strongly as other areas.

Diversification and Sector Performance

Beyond tech, experts point to other areas showing strength:

• Commodities: Gold is up, and silver was mentioned earlier. Copper has broken out, and aluminum is showing similar trends.
• Banking: Banks are turning around.
• Housing: Housing starts have begun to turn around.
• Healthcare: Experiencing a big move.

A warning sign would be if staples (essential goods) started to do well across the board, as this would indicate a shift towards value and a potential peak. Currently, there's an underlying "risk-on" element.

Earnings and Future Catalysts

Liz Peek emphasizes that earnings have been the driver of market performance. She believes earnings expectations are rising into next year due to several factors:

• Stimulus: The "one big, beautiful bill" of stimulus is expected to provide a significant boost.
• Investment: Companies are planning to invest in the U.S.
• World Cup: Expectations of a $17 billion economic influx from the World Cup are also a positive factor.

However, she cautions that the labor market needs to be watched, as a Warren survey suggests layoffs could increase, which could be a "wrinkle."

Federal Reserve and Interest Rate Outlook

Futures traders are pricing in an 87% chance of the Fed cutting rates by a quarter point this month.

There's a significant development regarding the Federal Reserve chairmanship. President Trump stated he has made a decision on who will replace Jerome Powell next year. Kevin Hassett indicated he would be happy to serve if chosen. Hassett expects the President to interview final candidates over the next couple of months, with a decision likely around the New Year.

Victoria comments that it wouldn't be surprising if Hassett were nominated, as it could lead to expectations of more rate cuts. She notes that the Fed has already discussed another near-term cut. The key factor will be if inflation expectations start to rise. If they do, holding yields and rates might be preferred. The question for the new chair will be whether they push for lower rates even if the market isn't calling for it. For now, whoever takes over will likely inherit an environment where rates are expected to move lower.