US MARKET CALL: Yes, AI Is Too Big To Fail

I. Bonds We've all been suffering from AI fatigue for a while. The daily news about it has been head-spinning. We've been warned that AI is a bubble that will burst, just as the late-1990s tech bubble led to the Tech Wreck in the early 2000s. Analogies to the credit excesses of the Great Financial Crisis have also been proffered. Last week's rout in AI-related stocks convinced the naysayers that the AI bubble is bursting, just as they’ve long predicted it would. Our happier spin is that the Bond Vigilantes are now doing a good job of regulating and allocating capital to the AI ecosystem. Credit-quality spreads are widening to reflect the riskiness of the bonds issued by some of the dodgier AI-related borrowers like CoreWeave and Oracle. The rapidly rising cost of credit for such borrowers should deflate the AI bubble without bursting it. If some AI-related credits do blow up, the Godfathers of the AI mafia (along with their protectors in the government) will clean up the mess. As in "The Godfather II," Michael Corleone has too much at stake to let his brother Fredo screw up the family business. Meanwhile, the rout in the AI corporate bond market has triggered a flight to quality and safety that has stopped the rout in the US Treasury bond market (chart). This confirms our thesis that the recent rise in US bond yields mostly reflects better-than-expected economic growth. Tougher credit conditions in the AI corporate bond market should curb some of the AI excesses. However, we doubt this will trigger an economy-wide credit crunch or a recession. We aren't convinced that it will slow capital spending much, since labor and materials shortages, along with public NIMBY pushback, have already slowed the pace of data center construction. II. S&P Earnings The big banks reported mixed but solid overall Q3 earnings last week. On average, they met banking industry analysts' expectations. Last week, the consensus EPS for all analysts covering S&P 500 companies edged up to $365.70 this year, $424.19 next year, and $492.62 in 2028 (chart). Those are extremely bullish expectations considering that we are still forecasting $500 in 2030! If the analysts are right, the S&P 500 could rise to 10,000 by the end of next year, assuming a forward P/E of 20.0-21.0. For now, we are sticking with 10,000 by the end of the Roaring 2020s, i.e., at the end of 2029. Last week, Q3's consensus EPS growth rate remained at 24.0% y/y, while the Q4 estimate rose to 29.8% (chart). We've been among the most bullish investment strategists on the Street, but analysts are still ahead of us. The S&P 500, S&P 400, and S&P 600 continued to rise to record highs last week (chart). III. Stock Valuation The recent stock market selloff has been driven by falling forward P/Es even as forward earnings have been rising to record highs (chart). The former are nearing the troughs they made during last year's "Liberation Day" lows. Since roughly mid-2025, rising FEMO (fabulous earnings momentum) has more than offset falling FOMO (fear of missing out) (chart). Since October 6, the reverse has been true: Falling FOMO is outpacing the rise in FEMO. IV. Performance The stock market had a tough week last week. Leading the 1.95% pullback was MAGS (down 3.89%), while XMAGS fell 1.38% (chart). The Russell 2000 fell 2.4%, while the Nasdaq fell 4.5%. The DJIA rose 0.67% for the week. The Impressive 493 is still outperforming the Magnificent-7 on a year-to-date basis, with a gain of 14.1% versus 10.2%. V. Sentiment The market letter writers have been more bullish than retail investors lately (chart). Odds are they will both be a bit more pessimistic this week. Only 47.4% of the S&P 500 are trading above their 200-day moving averages (chart). VI. Commodities Aluminum prices are falling after matching their 2022 peak. This suggests that supply-chain disruptions attributable to Gulf War III are receding, as they had done after Russia invaded Ukraine (chart). Copper prices remained near their recent record high last week despite chatter that tightening credit conditions could slow the AI buildout and weigh on overall GDP growth (chart). The outlook for higher-for-longer diesel prices offers no relief (chart). We aren't giving up on gold yet. The current correction resembles previous ones that occurred in the middle of significant gold bull runs (chart). This time, rising interest rates have been weighing on the metal's price. However, significant buying by the People's Bank of China and other central banks isn't interest-rate sensitive. We are still aiming for a gold price of $5,000 an ounce by the end of this year or early next year. 💡 Join the discussion with Ed below! To leave comments or questions, log in to the Yardeni QuickTakes website and post them at the end of the QuickTakes article. Paid members' contributions may be featured in our segment, "Ed Answers Your Questions".