Markets and Economy Above the Noise: AI, earnings, and permabears

What year is this?

When people ask me what period today resembles, I suspect they want me to provide an historical episode associated with a market crisis. Perhaps 1873 or 1893, when excessive railroad expansion and speculative financing ended in crisis. Or maybe 1999 and 2000, when investors poured capital into internet startups long before viable business models emerged.

But my answer is likely unsatisfying. I don't think there is a parallel to crises of the past.

Railroads and the internet were transformative technologies, but in both cases, capital raced ahead of demand. Too many rail lines were built for the traffic they carried. Too many internet companies were funded before customers, revenues, and profits existed. Technology changed the world, but much of the investment arrived before the economic reality.

Today’s environment looks different. The demand isn’t hypothetical. Demand for computing power has already exceeded supply. Companies are scrambling for chips, memory, data centers, energy, and network infrastructure because the need already exists. As artificial intelligence (AI) evolves from answering questions to deploying agents that work continuously, the appetite for computational resources should only grow. This is less a story of capacity chasing uncertain demand and more a story of demand straining against limited capacity.

If anything, it might resemble 2023. Back then, many investors worried that war, elevated oil prices¹ and rising bond yields² would eventually undermine the economy and stock markets. Sound familiar? Yet, inflation expectations had peaked in the prior year,³ corporate earnings had been strong,⁴ and stocks finished the year with strong gains.⁵

My apologies for the boring answer. Sometimes the most important thing about history is anticipating when the worst outcomes aren’t likely to be repeated.

It may be confirmation bias but…

… the much-anticipated productivity gains from AI and other technological advances may already be showing up in the data. Consider that US corporate earnings rose roughly 25% over the past year,⁶ while nonfarm payroll growth has been essentially flat.⁷ Historically, earnings growth of that magnitude has been accompanied by meaningful hiring. Today, many companies have been earning more without adding large numbers of workers. And this isn’t just a story confined to technology companies or the US. Evidence of stronger earnings has been seen across sectors and across global markets.

It was said

“I love the permabears. They do all the hard work of identifying what could go wrong, which allows me to focus on evaluating what they may be missing, and to concentrate on what could go right.”
– Ed Yardeni, economist

Amen. I couldn't have said it better myself. What have the permabears served over the past year?

1. Stocks were supposedly too expensive. Yet earnings growth has outpaced the market's advance, and valuations have generally moderated even as indexes moved higher.⁸
2. Then came concerns about concentration and narrow leadership. More recently, equal-weight indexes have begun outperforming, suggesting participation has been broadening beneath the surface.⁹
3. Next it was oil prices and the Federal Reserve. But oil has been relatively flat since early April,¹⁰ inflation expectations remained well-anchored,¹¹ and the economy continued to show resilience.¹²

Nonetheless, I'll keep listening to the bears. Their arguments help challenge assumptions, test convictions, and guard against complacency. In that sense, they serve an important purpose. But as Ed Yardeni suggested, they're also doing some of the negative work for the rest of us, freeing up our time to focus on where the opportunities are.

Since you asked (part 1)

Q: What are your thoughts on the US-Japan coordinated yen intervention?

A: There’s a narrow interpretation and a broader, more important one. The narrow view is that policymakers were simply responding to a disorderly decline in the yen and attempting to stabilize currency markets.

Instead, I viewed the intervention as a signal that US policymakers have been increasingly focused on preserving stability across interconnected markets, particularly the Treasury market. With Japan a major holder of US government debt and long-term Treasury yields having moved meaningfully higher, the coordinated action and the emphasis on mechanisms that reduce the need for Treasury sales suggested to me that the US Treasury stands ready to support market functioning if necessary.

At a time when investors are concerned about rising deficits, growing debt issuance, and higher 30-year Treasury yields,¹³ I believe the intervention sent a message that policymakers are paying close attention to these pressures and are prepared to respond if market moves become destabilizing.

Since you asked (part 2)

Q: Does Citadel's rescue financing of hedge fund Situational Awareness signal the kind of excess that often accompanies a market top?

A: I’d be careful about viewing Citadel’s rescue financing of Situational Awareness as a classic market top signal. Market tops have typically been associated with deteriorating fundamentals, weakening earnings, tightening liquidity, or a broad loss of confidence. In this case, the issue appears to have been much more idiosyncratic. Situational Awareness was heavily leveraged during a period of market consolidation rather than a period in which the underlying economic or corporate earnings backdrop appeared to be unraveling. When leverage meets short-term volatility, even in an otherwise constructive environment, accidents can happen.

It’s also worth noting that the availability of capital willing to step in and provide rescue financing can be viewed as a source of strength rather than a warning sign. Distressed investors exist for moments like these, providing liquidity when individual market participants find themselves under pressure. Rather than exposing a systemic problem, I believe the episode demonstrated that there’s capital available to absorb isolated stress. The market’s reaction reinforced that point in my view. Since the period in which Situational Awareness encountered difficulties, the US tech sector has already retraced much of its prior decline.¹⁴

Think/rethink: Where familiar beliefs meet inconvenient evidence

Think: Token volumes aren’t growing fast enough to justify the AI infrastructure build.

Rethink: Agentic workflows could dramatically increase AI usage because they do far more than answer a single prompt. A typical human interaction may consume only a few thousand tokens, while an AI agent that plans, researches, analyzes, drafts, critiques, and revises can consume hundreds of thousands or even millions of tokens.¹⁵

Phone a friend

US Treasury rates have risen in recent weeks. I reached out to Rob Waldner, Head of Invesco Fixed Income, to hear his views. Here’s his response:

“We maintain a neutral stance on US interest rates. The bond market has priced in almost two Fed rate hikes over the next year,¹⁶ although we expect policy rates to remain on hold, because of easing inflation pressures¹⁷ and trend-like economic growth.¹⁸ Under normal circumstances, current market pricing could provide sufficient risk premium to justify a long duration position. However, elevated geopolitical risks and uncertainty may argue against taking a more directional view. With both uncertain economic and geopolitical outcomes, we believe the balance of risks has been broadly even, and therefore we remain neutral on longer-term rates.”

On the road again

My travels recently took me to Hong Kong and Beijing. The world doesn't need another market strategist pointing out China's advances in high-tech exports, open-source AI, electric vehicles, robotics, and countless other industries. What stood out to me was something far less quantifiable. I've often said that despite the constant focus on division and conflict in the US, my experience traveling the country is overwhelmingly positive. I meet thoughtful, intelligent, and empathetic people everywhere I go. After this trip, I can say the same about China. Beneath the headlines and geopolitical competitions, I see people who, like most of us, are simply looking to enjoy life and build better futures for themselves and their families. I’m already looking forward to my next visit to a Beijing hutong bar.