Headline Numbers Lie in Both Directions
Reported earnings look very good, but the surface hides the real story. Much of the gains come from AI capex - money spent building AI - that has not yet turned into revenue or earnings. Growth beat expectations and looks phenomenal "for now," carried by momentum and optimism. That is not the full picture of what plays out over the next 6, 12, or 24 months.
The same effect inflates GDP. The recent growth came largely from data center buildout, which adds jobs, work, and GDP. Strip out AI capex and GDP is actually contracting. If AI spending slows, the economy slows with it. So the headline numbers make corporate profits - especially for big tech, semiconductors, and hyperscalers - look far stronger than the underlying reality.
Some areas did get a real AI boost, like cybersecurity: more AI adoption means more cybersecurity is needed. The open question stays monetization and return on investment.
Self-Funding Tech Is the Safer Bet
Tech companies that fund themselves with cash and do not issue new debt are the safer choice as AI capex depreciation and the AI trade sort themselves out. Companies issuing hundreds of billions in debt and getting investors to buy it could still go up exponentially, but that is a riskier bet. Treasuries now compete with big tech's private capital for all the money flooding into corporate bonds and treasuries. Be cautious about pouring money into firms that just issue new debt. Favor the ones self-funding with cash - they are safer and get hit less hard if capex depreciation comes home sooner than expected. Exponential growth is exciting but carries real risk.
The K-Shaped Consumer
Many people want to say the consumer is in dire straits. The data shows a K economy: the bottom third is struggling. Auto delinquencies peaked higher than ever, consumer sentiment sits at lows, and reserves are ramping up for buy-now-pay-later and subprime users. The prime borrowers tell a different story - JP Morgan (JPM) and the big banks are releasing reserves set aside for losses.
Be wary of sectors heavily exposed to that bottom consumer. Affirm (AFRM) just posted phenomenal guidance and earnings and its stock is ripping, but that is exactly where I would not commit too much money - sectors with wide exposure to the bottom third, where those consumers may already be in a deep recession, unable to make it paycheck to paycheck.
The 2008 fear of mortgages and debts overtaking incomes is not playing out the same way, because many borrowers locked in low rates. That leaves safe havens. Get more defensive - move toward companies that do not concentrate all their revenue in the bottom half of the economy. Staples and healthcare look defensive, and money has shifted in some periods away from big tech into biotech. Over the next six months, watch carefully and reallocate a little into sectors that have not been loved. Some software names ripped over recent weeks, which is just a rotation of capital from one area to another. When the shoe drops - 6, 12, or 24 months out - you do not want to be caught off guard.
Is This 2008? No
From an economist's view it would be easy and convenient to say this is exactly like 2008, because that gives a roadmap. It is not 2008. Household debt service sits below pre-pandemic levels. Household leverage runs around 68% of GDP versus about 100% before. Record debt, but a low burden servicing it. Apples to oranges.
The canaries in the coal mine are subprime lenders and borrowers, plus private credit. Goldman (GS) and other banks with large private credit funds are protecting themselves by raising reserves. The real triggers: the moment the labor market weakens, the moment private credit starts to crack, and how America's own debt crisis unfolds with roughly $40 trillion in debt still building, plus how the bond market reacts. So it differs from 2008, but the fallout from debt-fueled momentum growth will look similar in price action.
The Fed and Jackson Hole
Do not expect much real insight from Kevin Walsh's speech - that fits his recent pattern, coy in how he communicates. What the market does with it is anybody's guess. Some traders joked to "appoint an animal to the Fed board" - do anything to add volatility, because the calm is killing swing trades.
Expect him to stand firm and act to fight inflation, with nothing new. The period of raising rates has passed. For the last couple of years I argued they should have raised quicker and faster to fight inflation. Inflation is still a problem, but it is coming in line and seems tamed to the public. The danger now: if they raise rates, they start to crack the consumer and liquidity in private credit and other areas. So expect little to happen. If something does, it would shock the system and show up. Otherwise, business as usual - the Fed stands pat.
