Stocks rose in July and early August only to give back those gains later in the quarter. Two consistent headwinds paused the bull market: high oil prices — along with the resulting inflation — and a surprisingly fast rise in interest rates. Crude oil rose throughout the quarter and, not surprisingly, energy was a leading sector. I believe Wall Street continues to underestimate the premium needed for Mideast oil and stability.
Treasury yields climbed to their highest levels in decades, thanks to high government deficits, stubbornly high inflation, and competition from large AI companies that are raising debt to fund the AI buildout. Most analysts point to inflation as the largest factor, but I believe it is government debt. The U.S. annual deficit is about 6 percent of GDP, a level typically seen only during wars and recessions, and national debt exceeds $40 trillion.
These two headwinds paused the equity advance, but I’m impressed that a period of broad-based selling hasn’t occurred. On days when tech stocks are strong, most other sectors are weak; when tech retreats, many of the other sectors advance. So far, the recent weakness feels like a normal September selloff. September is often a seasonally weak period.
Corporate profits are the fuel for this bull market and it feels like investors lose sight of that whenever it isn’t earnings season. In the second quarter, S&P 500 earnings rose the most since 2021. In October’s numbers, we’ll see if that momentum carried into the third quarter. I expect so.
But what if stocks are topping instead of pausing? History shows that market manias end when the window to raise new capital closes. The money required for the current AI buildout is extremely high. In fact, The Wall Street Journal calls it the biggest economic bet in U.S. history. To justify the level of spending, some analysts believe that American businesses and consumers will need to spend as much of their income on AI as they do on food. Yikes.
Currently, capital continues to pour into AI stocks. If those funding sources (hedge funds and those in private credit/equity) dry up, watch out. When that happens, the largest AI companies will be forced to address their “burn rate.” We aren’t there yet but we’ll learn more about investors’ enthusiasm soon. Anthropic is expected to go public in the fourth quarter and OpenAI will have its IPO in 2027. We’ll keep watch.
David Vomund is an Incline Village-based fee-only money manager. Information is found at www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
