What is the biggest driver of market action? The AI boom or the Fed?

Key Concepts

• FOMC (Federal Open Market Committee): The monetary policy-making body of the Federal Reserve System.
• Neutral Rate: A theoretical interest rate that neither stimulates nor slows economic growth.
• AI Infrastructure Trade: Investment in the foundational hardware and software required to build and run AI systems.
• Mag-7: Refers to the seven largest and most influential technology companies (Microsoft, Apple, Google/Alphabet, Amazon, NVIDIA, Tesla, Meta).
• Picks and Shovels Strategy: An investment approach focused on companies that provide essential tools and services to a booming industry, rather than directly investing in the industry's end products.
• Two Nanometer Node: A highly advanced semiconductor manufacturing process that enables the creation of more energy-efficient and high-performing chips.
• Monetary Policy Lag: The time it takes for changes in monetary policy (like interest rate adjustments) to have their full effect on the economy.
• Fiscal Deficit: The difference between government spending and revenue, indicating how much the government needs to borrow.

Global Macro and Fed Interest Rate Policy

Bill from Liontrust Asset Management highlights that there is no debate about the Federal Reserve easing monetary policy; the core discussion revolves around how fast and when the next phase of easing will commence. Uncertainty for December stems from more hawkish FOMC members who feel there isn't enough current data to fully assess the economy's evolution. These members remain concerned about inflation, which is "still hanging out at this level that is still above our 2% target."

However, Bill asserts that "every member of the FOMC would agree that the neutral rate is below where we are today, and every member of the FOMC wants to get there." The speed and timing of this transition are the central points of contention.

Connecting this to the AI sector, Bill suggests that "the markets are more concerned about the AI trade than the Fed." He points to Google, where the introduction of the "Gemini 3" model has provided clearer visibility on cash flow. In contrast, NVIDIA, which is heavily tied to the "infrastructure trade," faces more questions regarding its cash flow visibility.

AI Trade vs. Fed as Market Driver

Storm, also from Liontrust Asset Management, concurs that AI is a significant market driver. He notes a "very important reset in sentiment over the last four weeks," following a period in July and August where the market got "really ahead of itself" due to large deal announcements.

Storm emphasizes that AI represents "without a doubt a very large structural shift," projecting a build-out of "$3 to $4 trillion of AI infrastructure by 2030." He views the recent market "bumps" as opportunities, stating that Liontrust has been "taking the opportunity of this market reset to start building back into some positions like NVIDIA, like Applied Materials." Specifically, he notes that "NVIDIA is now trading at a market multiple," making it a "very attractive entry point" for investors.

Broadening of AI Opportunities Beyond "Mag-7"

Storm strongly believes that AI investment opportunities extend "well outside the Mag-7." He explains that the Mag-7 companies are often "paying for this CAPEX build out," indicating a fundamental shift where "the value economic profit within the technology sector is shifting down into the infrastructure layer from the software layer."

This perspective informs their investment strategy: "we don't own Microsoft, we don't own Amazon, we don't own Alphabet." Instead, they are "investing in companies like Applied Materials that are the picks and shovels for this build out." Applied Materials, for instance, provides the equipment for TSMC to manufacture silicon. As the industry transitions to the "two nanometer node," enabling Apple, NVIDIA, and AMD to produce more energy-efficient and high-performing chips, Applied Materials is positioned to "really win over the next three years."

Economic Backdrop for 2026 and the Case for Rate Cuts

Bill argues that current interest rates are "too high relative to where the economy is going and where the economy is." While the Fed's growth estimates might exceed 4%, much of this is "skewed toward capital spending," largely driven by the AI infrastructure trade. The "rest of the economy is not so strong."

He provides supporting evidence:

• Wealth Distribution: "90% of the stock market wealth is owned by the top 10% of the population," those with incomes "well over $100,000."
• Income Disparity: Many in the "bottom half of the income distribution are... paycheck to paycheck."
• Labor Market: There's an "employment slowdown," with "more layoffs and certainly more M&A in the high wage industries."
• Uneven Growth: Employment growth is primarily in "low wage service sectors like health care and retail," indicating a lack of broad-based economic strength beyond the tech sector.

Given these factors, Bill concludes there's "a very good case to be made that rates should be cut and they should be cut quickly," especially considering that the impact of monetary policy typically takes "about a year to year and a half" to materialize.

Fiscal Policy Outlook and 2026 Prospects

Regarding the fiscal side, Bill expresses hope that a potential President Trump could "carry out his agenda of shrinking the size of government, lowering taxes, and getting rid of regulations." However, he has "not a lot of hope that Congress is going to get much beyond more of the stalling that it's been doing."

The "deficit is as bad as it has ever been," and the "only hope that we have for some kind of closing of the fiscal deficit would be from tariff revenues," which he notes is "in question right now."

Conclusion

The discussion highlights a critical juncture where monetary policy, driven by the Federal Reserve's easing intentions, intersects with the transformative power of the AI trade. While the Fed's timing and pace of rate cuts remain a key debate, the market's focus is increasingly on the structural shift brought by AI. Investors are advised to look beyond the traditional "Mag-7" and consider "picks and shovels" companies in the AI infrastructure layer, such as Applied Materials, as economic profit shifts from software to hardware. The broader economic backdrop, characterized by uneven growth, wealth disparity, and a slowing labor market, underscores the urgency for rate cuts, while the fiscal outlook remains challenged by a persistent deficit and congressional gridlock.