Has The AI Bubble Popped?
1.) EARNINGS - First it was Meta. Then Google. Then Amazon and Intel. What am I talking about? Earnings. Specifically, these heavy weights in the AI infrastructure play MISSING earnings. That doesn't happen very often for these big players. So, it begs the question...has the AI Bubble popped? Regardless of what one thinks about the quality of these companies, the market is the real arbiter. And so far, the market is telling you it does not like what these heavy weights are reporting / saying. The market doesn't like the cash burn, negative free cash flow, slower core growth, and soft near-term guidance that's going on within the AI field. Bottom line is that investors have shifted from rewarding AI narrative and top-line beats to demanding better free cash flow, clearer ROI timelines, and less aggressive near-term spending. It's now a "show me the returns" phase. Now, these companies that missed earnings are getting smoked and that has investors worried that the whole market will implode. I think it's too early to say if the bubble has popped until Nvidia (NVDA) announces earnings mid-next month. It's also probably important to remember that the US doesn't grow only due to AI. US GDP already subtracts imports, so imported chips and servers largely cancel out. The headline number was +3.4% for Q3 real GDP growth, against 3.2% expected. But the market looks forward. Right now, forecasts for Q1 growth and inflation is suggesting a deceleration for both. Markets don't like that and that could be what is starting to get priced in.
2.) $700 BILLION - Goldman Sachs (GS) forecast roughly $700 billion in U.S. stock offerings for 2026. Yep...that's a lot. If you told me companies were going to sell $700 billion worth of stock this year, I'd have thoughts - "no way...who's going to buy all that?!" I mean how can the market absorb it all? There have been some scary stories circling around that data point. But, then it seems nobody bothered to do the math. Imagine that. In market space, it's always best to ask what something is relative to. Tell me he weighs 500 pounds. Ok...but are we talking about a person or a horse? Because I have very different concerns depending on the answer. Same with markets...before we decide whether a number is big or small, good or bad, we need something to compare it with. And once you put that $700 billion next to the size of the market, and look at who’s buying shares, the story gets a lot more interesting. No doubt that $700 billion is a lot of stock. But it’s only about 1% of the market’s value. But stock buybacks matter a lot as well. A buyback is exactly what it sounds like. A company “buys” its own shares “back” from investors. And companies are expected to buy back more stock than the amount coming to market through issuance. Goldman’s report called for about $1.4 trillion in U.S. buybacks in 2026, compared with roughly $700 billion in new issuance. Why does this matter? Well, the $700 billion of issuance is about 1% of the market. The forecast for buybacks is even larger. Those seem like useful facts to include before we start sounding the alarm too loud.
3.) RATES - If the market is in fact pricing in a deceleration in both growth and inflation for Q1, 2027, where might that show up first? Bond yields...and as I've written, bond yields have been breaking down. The US Treasury 20 and 30 year yields were the first to break trend, and now the 10YR is very close to following. Our more moderate, diversified models have increased bond exposure by a considerable amount recently. Those models focus on short to intermediate term Treasuries - BIL and IEF. IEF is breaking out to a bullish trend this morning as rates break down. As I mentioned a few days ago, counter trend bounces happen. But now that has turned bonds from a sellers market to more of a buyers market. In other words, it would appear that bonds have become a "buy the dip" asset.
