Below are some of the most interesting things I came across this week. Click here to subscribe to our free weekly newsletter and get this post delivered to your inbox each Saturday morning.
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Ruchir Sharma writes, “Magical thinking flourishes in a bubble’s final stages. One central myth of the dotcom era was that ‘enormous’ demand for internet products had freed tech firms from ordinary economic forces, such as interest rates.”
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“Magical thinking” may also be on display in analyst earnings forecasts. “Despite analysts’ soaring long-term earnings growth (LTEG) expectations this year, the S&P 500’s forward P/E has declined to 18.1. Investors are increasingly reluctant to pay up for earnings growth that may prove unsustainable,” reports Yardeni Research via Daily Chart Book.
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Earnings growth coming in anywhere near the level implied in analyst forecasts would clearly indicate that the Fed is way behind the curve today. Already, Torsten Slok writes, “A macroeconomic model based on the historical relationship between interest rates, GDP and inflation suggests the Fed would need to raise the funds rate by about 275 basis points, from roughly 4% today to 6.75% by the end of 2027, to bring CPI back to its 2% target.”
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As Sharma notes, that would not be good for the AI Bubble; insiders certainly appear to think so. The Wall Street Journal reports, “‘We’re seeing really significant demand from folks looking to protect downside,’ said Stephen Solaka, a senior vice president at Gateway Investment Advisers… Solaka oversees portfolios for individuals who often have concentrated bets in individual stocks, including the tech giants that have powered markets in recent years. Increasingly, he said, his clients—some of whom are former employees of those very technology companies—are looking for something else: insurance. ‘These people have made so much money, they’re quitting to hedge their stock,’ Solaka said, adding that some companies have restrictions around employees’ trades.”
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And it’s not just insiders that should be concerned. As Reuters reports, “A downward repricing of AI-related equities could generate a ‘meaningful’ negative wealth effect. Economists at Goldman Sachs estimate that the boost to consumer spending growth from positive wealth effects was
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