Markets and Economy Is the angst over AI spending and Fed inaction warranted?

There is growing angst among investors today. Market drawdowns and bouts of volatility are a normal part of investing, but they inevitably raise the same question: Has something meaningful changed? The recent weakness in the technology sector, particularly among chipmakers and memory companies, has amplified those concerns. Headlines have described the move as carnage, and from the perspective of recent price action, that characterization is understandable. Yet the term loses some of its impact when viewed in a broader context. Many of the companies at the center of the selloff remain significantly higher year to date¹, following extraordinary gains over the past several quarters.

Stepping back, the broader market doesn’t look like it’s falling apart.

• Credit markets, often a more reliable indicator of underlying economic stress, have remained remarkably resilient — credit spreads have been contained, suggesting little concern about deteriorating growth or financial conditions.²
• Meanwhile, the S&P 500 Equal Weight Index has continued to push toward new highs.³

That’s not the behavior of a market signaling recession or systemic trouble. Rather, it looks more like a consolidation within the most crowded and successful segment of the market after a historic advance.

Two critical issues: AI and the Fed

At the heart of the current debate are two critical questions.

• First, have the hyperscale technology companies overinvested in the race for AI compute? If so, demand for chips, memory, networking equipment, and related infrastructure could eventually disappoint.
• Second, has the Federal Reserve fallen behind in its effort to contain inflation, forcing interest rates higher and putting pressure on equity valuations?

I find myself taking the other side of both arguments.

AI: An economic force that may warrant today’s spending

Consider the technology story first. The selloff has not occurred against a backdrop of weakening demand. In fact, the fundamental data point in the opposite direction. Earnings across much of the AI ecosystem have remained strong. Backlogs for key providers continue to expand, indicating that customers are still seeking capacity faster than can be delivered.⁴ If anything, the challenge remains supply rather than demand. The market's concern is not that AI adoption has stalled, but whether current investment levels have gotten ahead of future returns.

That distinction matters. Ultimately, the debate comes down to how investors frame the opportunity. If AI is simply another software upgrade cycle, then concerns about overspending are understandable. But if AI represents a restructuring of the global economy, the implications are far larger. The latter view is more compelling. Artificial intelligence is increasingly touching every sector, from health care and manufacturing to financial services and education. If that proves correct, today's investment levels may eventually look modest relative to what may be required over the next decade. The buildout of compute, power infrastructure, networking capacity, and data centers could have much further to run than many investors currently envision.

Inflation: The Fed doesn’t appear behind the curve

On the inflation front, the evidence also argues against a more pessimistic interpretation of the Fed’s stance on rates. Inflation expectations have remained well anchored.⁵ Financial markets offer a real-time check on these concerns, and neither the inflation swap market⁶ nor Treasury breakeven rates suggest investors expect a meaningful inflation problem ahead. Markets are forward-looking, and they continue to signal confidence that inflation should remain contained over the medium term. If inflation expectations are stable, it becomes difficult to build a strong case that the Federal Reserve is materially behind the curve.

Is the bull market over, or just on pause?

None of this means volatility is over or that technology stocks cannot experience further corrections. Momentum-driven sectors often overshoot in both directions. But it is important not to confuse a momentum unwind with a fundamental deterioration. The broader market, credit conditions, inflation expectations, and the underlying demand trends surrounding AI all point toward a different conclusion.

The upshot is that what we are witnessing appears less like the end of a cycle and more like a consolidation within one. Leadership is rotating, expectations are resetting, and investors are questioning assumptions after a remarkable run. Those are healthy developments. The weight of the evidence suggests this remains a structural bull market experiencing a pause, not a market confronting a broken narrative.