Key Takeaways
\nDespite increasingly stretched artificial intelligence stock valuations, some analysts believe prices could go even higher if the Federal Reserve aggressively cuts interest rates to stimulate a weakening economy.Historically, bubbles have been fueled by low interest rates and popped by rising rates.The Fed on Wednesday cut its benchmark rate for the second time in as many months, and market participants are pricing in the likelihood of more cuts. However, with the economic outlook highly uncertain, future monetary policy remains unpredictable. <\/p>\n
Concerns about an AI bubble have some on Wall Street warily eyeing Silicon Valley, but others say they’re looking in the wrong direction. Washington, D.C.\u2014specifically the Eccles Building, where the Federal Open Market Committee<\/a> sets monetary policy\u2014is where the fate of an AI bubble may be decided, they say.\u00a0\n<\/p>\n \u201cI think you\u2019re going to have a very hard time popping a bubble when the Fed is cutting rates,\u201d said Jeff deGraaf, Chair and Head of Technical Research at Renaissance Macro Research, on a recent episode of the firm\u2019s weekly Youtube series. The Dotcom bubble<\/a>, the U.S. housing bubble<\/a>, and the Japanese bubble of the late 1980s all popped either while or shortly after central banks hiked rates, according to deGraaf.\u00a0\n<\/p>\n Artificial intelligence has propelled stocks to record highs this year, but recent developments have raised some red flags<\/a>. A series of circular deals by the likes of AI bellwethers Nvidia<\/a> (NVDA<\/a>) and OpenAI<\/a> have drawn comparisons to the vendor financing agreements that fueled bubbles in the 1990s. The Magnificent Seven<\/a> account for 35% of the S&P 500, evidence of an increasingly concentrated stock market. And the benchmark index\u2019s price-to-earnings ratio<\/a> isn\u2019t far off the Dotcom Bubble\u2019s peak.\n<\/p>\n Why This Is Important<\/p>\n Financial bubbles form when unbridled optimism about future growth causes asset prices to become detached from their inherent value. Low interest rates can fuel bubbles by depressing returns on low-risk investments and reducing the cost of speculation. High interest rates can have the opposite effect.<\/p>\n \u201cI think it\u2019s early,\u201d DeGraaf said of a potential AI bubble, evidence of which he argued doesn\u2019t appear to be \u201crampant\u201d yet. Though, he warned, \u201cyou could have [a] world play out where the economy softens, the Fed is forced to get more aggressive, and the market absolutely goes into the stratosphere because they\u2019re looking at the liquidity<\/a>. And I think that\u2019s a big disconnect that people don\u2019t appreciate.\u201d\n<\/p>\n UBS analysts made a similar case last month. The Fed, they noted, raised interest rates by 1.75 percentage points from June 1999 and May 2000, and those rate hikes were a primary catalyst for the Dotcom bubble’s bursting in early 2000.\n<\/p>\n \u201cThe current monetary policy environment is very different from back then,\u201d the analysts wrote. The Fed cut interest rates<\/a> for the second consecutive meeting on Wednesday, and the consensus on Wall Street is that the only direction interest rates are headed anytime soon is lower.<\/p>\n Interest Rate Outlook Is Murky <\/p>\n Policymakers are walking a tightrope as they pursue both ends of their mandate to control inflation and promote maximum employment. Hiring ground to a halt in recent months while inflation accelerated<\/a> to its highest rate since January. Fed officials have recently expressed openness<\/a> to cutting interest rates to support the weakening labor market despite inflation concerns.\u00a0\n<\/p>\n Fed Chair Jerome Powell on Wednesday reminded investors<\/a> that the trajectory of interest rates may be less predictable than expected. “A further reduction in the policy rate at the December meeting is not a foregone conclusion\u2014far from it,” said Powell.\n<\/p>\n For one, economists expect inflation to continue accelerating in the coming months, and consumers\u2019 inflation expectations ticked up in October, which could set the stage for one-time price increases to become sustained inflation. On the other hand, a weak job market could hamper wage growth, relieving some inflationary pressure in the process.\u00a0\n<\/p>\n Analysts at LPL Financial also note that the reason behind interest rate cuts can matter as much for borrowing costs and liquidity as the cuts themselves. Cutting rates five times while inflation is stuck above the Fed’s 2% target “could send a signal that the central bank is prioritizing growth over inflation control,” which may raise long-term Treasury yields<\/a> and, subsequently, interest rates on an array of consumer and commercial loans. On the flip side, if the Fed cuts rates less than investors expect, bond prices would likely fall, boosting yields and associated interest rates.\n<\/p>\n Powell on Wednesday expressed doubt that the Fed’s interest rate decisions would have much of an impact on the AI investment that’s at the heart of Wall Street’s bubble concerns. “I don’t think interest rates are an important part of the data center story,” he said. Rather, he added, investment is being funded by strong businesses at large companies acting on demand signals.<\/p>\n","protected":false},"excerpt":{"rendered":"Key Takeaways Despite increasingly stretched artificial intelligence stock valuations, some analysts believe prices could go even higher if…\n","protected":false},"author":2,"featured_media":260696,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[45],"tags":[182,181,507,74],"class_list":{"0":"post-260695","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-artificial-intelligence","8":"tag-ai","9":"tag-artificial-intelligence","10":"tag-artificialintelligence","11":"tag-technology"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/260695","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/comments?post=260695"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/260695\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media\/260696"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media?parent=260695"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/categories?post=260695"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/tags?post=260695"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}