Economic expansions don\u2019t die of old age, and stock market rallies \u200brarely do either. Some catalyst is needed to burst the bubble. In the case \u200cof the current AI boom, that may well be rising interest rates.<\/p>\n
Economist Rudi Dornbusch famously said that aging expansions are killed by the Federal Reserve. Given the U.S. equity market\u2019s sharp pullback on Friday \u2013 particularly the move in tech \u2013 it looks like investors fear the Fed may strike again, only this time the main victim will be Wall \u2060Street.<\/p>\n
The Nasdaq \u200bfell more than 4 per cent on Friday, its biggest drop since the tariff turmoil around \u201cLiberation Day\u201d in April last year. Even more strikingly, the \u201cSOX\u201d chipmaker index plunged 10 per cent, its biggest fall since the pandemic in 2020, and the fourth-largest drop since the index was launched in 1994.<\/p>\n
True, the SOX had nearly doubled this year, but Friday\u2019s move was still seismic. All in all, some US$2-trillion was wiped off the value of U.S. equities, more than half of that in \u200bchip stocks.<\/p>\n
The selloff was notable not only for its ferocity but also its trigger: bumper U.S. employment \u200cdata. The rise in job growth in May came in at 172,000, double consensus expectations, while hiring in the previous two months was revised up sharply too.<\/p>\n
Typically, this would be good news, a reflection of a strong economy and buoyant consumer demand that should, theoretically, boost firms\u2019 profits.<\/p>\n
But Wall Street deemed the non-farm payrolls report to be \u201cbad news\u201d because it screamed \u201chigher interest rates.\u201d Combine that with a market priced for perfection, and you have the recipe for a major reversal.<\/p>\n
Signs have been multiplying that the AI mania \u200cis getting out of \u200bhand.<\/p>\n
For one, there\u2019s the massive increase in AI \u200ccapex forecasts, which naturally raises questions about future returns on that investment. Analysts at Goldman Sachs last week said they now expect US$5.3 trillion of capex spending in \u200b2025-2030 from the four largest hyperscalers, Meta, Microsoft, Amazon and Alphabet. That\u2019s up from US$4.5 trillion before the \u2060first-quarter earnings season.<\/p>\n
Then there\u2019s the eye-popping IPO blitz. The public listings of SpaceX , Anthropic and OpenAI are expected to deliver a combined \u2060market cap valuation just under US$4 trillion.<\/p>\n
That\u2019s a staggering figure, especially when you consider these firms\u2019 current revenues. SpaceX\u2019s 2025 sales were less than US$20-billion, OpenAI\u2019s annualized revenue barely topped US$20-billion, and Anthropic\u2019s first-quarter take \u200bthis year was less than US$5-billion. These figures will undoubtedly grow, but enough to justify these eye-watering IPO valuations?<\/p>\n
Then there\u2019s the fear-of-missing-out or \u201cFOMO\u201d trade, with stocks recording huge one-day moves almost wholly divorced from fundamentals. Exhibit A: shares in Marvell Technology, a US$100-billion company, rose 33 per cent in one day last week after Nvidia CEO Jensen Huang said the smaller chipmaker would soon be a trillion-dollar company.<\/p>\n
Bubble signs are flashing \u2013 to put it mildly.<\/p>\n
Equity strategists at Citi last week warned that their global \u201cbear market checklist\u201d was at its frothiest level since the global \u2060financial crisis in 2008 – and getting frothier.<\/p>\n
The checklist comprises 18 \u201cred flags,\u201d including earnings forecasts, fund flows, valuations, capex, investor sentiment, and equity issuance. Currently, on a global level, 10 out of 18 red flags are flashing, with 11.5 on the U.S. checklist.<\/p>\n
The checklist is not yet signaling the \u201coverexuberance\u201d that precipitated the 2000 and 2008 bear markets, Citi notes, but the direction of travel is worrying: \u201cOnce the count reaches double digits, it has historically tended to rise more rapidly, signaling a potential acceleration in risk.\u201d<\/p>\n
Before Friday, it seemed like nothing would stop this equity juggernaut. Sure, rotation within tech and across sectors has picked up \u2060in recent months and some large tech companies had registered big short-term share price declines. \u200bBut the benchmark indices continued to hit new high after new high.<\/p>\n
So why might this pullback be different?<\/p>\n
Bubbles tend not to be burst by a single trigger, \u2060but by a range of indicators moving into more extreme territory at the same time. Yet some triggers pack more of a punch than others. The cost of money is one of them.<\/p>\n
Bond yields are rising, \u200cand so too are policy rate expectations. A quarter-point rate hike from the Fed by December is now almost fully priced. That doesn\u2019t sound like much, but before the \u200bIran war, traders were expecting nearly three cuts.<\/p>\n
Add an increasingly solid labor market to the U.S. economy\u2019s high inflation and loose financial conditions, and the cost of money seems set to rise.<\/p>\n
If so, history suggests economic growth is at risk. So is the runaway stock market.<\/p>\n","protected":false},"excerpt":{"rendered":"Economic expansions don\u2019t die of old age, and stock market rallies \u200brarely do either. Some catalyst is needed…\n","protected":false},"author":2,"featured_media":724778,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[20],"tags":[62,901,276,277,888,902,879,877,903,49,48,876,895,896,891,878,875,46,549,295,894,887,914,880,881,893,889,890,884,904,885,909,910,912,907,911,905,908,882,898,899,714,897,906,865,61,900,892,886,883,913],"class_list":["post-724777","post","type-post","status-publish","format-standard","has-post-thumbnail","category-artificial-intelligence","tag-ai","tag-alberta","tag-artificial-intelligence","tag-artificialintelligence","tag-arts-news","tag-bc","tag-breaking-news","tag-breaking-news-video","tag-british-columbia","tag-ca","tag-canada","tag-canada-news","tag-canada-sports","tag-canada-sports-news","tag-canada-trafficcanada-weather","tag-canadian-breaking-news","tag-canadian-news","tag-economy","tag-education","tag-environment","tag-federal-government","tag-foreign-news","tag-globe-and-mail","tag-globe-and-mail-breaking-news","tag-globe-and-mail-canada-news","tag-government","tag-life-news","tag-lifestyle","tag-local-news","tag-manitoba","tag-national-news","tag-new-brunswick","tag-newfoundland-and-labrador","tag-northwest-territories","tag-nova-scotia","tag-nunavut","tag-ontario","tag-pei","tag-photos","tag-political-news","tag-political-opinion","tag-politics","tag-politics-news","tag-quebec","tag-sports-news","tag-technology","tag-travel","tag-trudeau","tag-us-news","tag-world-news","tag-yukon"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/724777","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/comments?post=724777"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/724777\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media\/724778"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media?parent=724777"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/categories?post=724777"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/tags?post=724777"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}