***** denotes well-worth reading in full at source (even if excerpted extensively here)
Economic Fare:
Market Fare:
......... As Bloomberg notes, first-quarter earnings strength hasn’t been limited to megacap tech. It’s showing up across sectors. Small caps are on a tear, bank profits are booming and firms keep plowing past macroeconomic obstacles. The breadth of earnings revisions has even accelerated since the start of earnings season. The EPS surprise for the median S&P 500 stock in Q1 is 6%, the strongest in four years
............... A key question for traders is whether the recent episode will mirror what happened at the peak of the Fed’s rate hikes in late 2023 and again after the market meltdown caused by Trump’s tariffs in the middle of last year.
In both cases, the 30-year yield only briefly held over 5%, delivering big gains to investors who bought at those peaks. A similar dynamic could play out again if a US-Iran deal means the oil shock fades or if the economy stalls, reviving bets on Fed rate cuts. ..........
Roberts: Market Correction Risk: Why Summer 2026 Looks Risky
The S&P 500 hit a fresh record high last week. The median stock in the index is sitting 13% below its 52-week peak. That divergence is not a footnote or a curiosity. It’s the loudest warning the market has flashed since the dot-com era, and it’s arriving at the worst possible moment on the calendar. Market correction risk is climbing, and this summer it’s stacked on top of three other forces that almost never converge at the same time.
The S&P 500 hit a fresh record high last week. The median stock in the index is sitting 13% below its 52-week peak. That divergence is not a footnote or a curiosity. It’s the loudest warning the market has flashed since the dot-com era, and it’s arriving at the worst possible moment on the calendar. Market correction risk is climbing, and this summer it’s stacked on top of three other forces that almost never converge at the same time.
........... S&P 500 earnings growth is projected to accelerate sharply from 13.4% in Q4 to 24.6% in Q1 – a four-year high and a level rarely seen outside of post-shock recoveries. Excluding special factors, this represents arguably the strongest earnings growth in two decades.
The AI boom is a clear contributor, but strength is widespread, with double-digit growth seen in average and median companies, and all 11 sectors posting positive growth for the first time in four years. This strong performance has in many places been driven by higher prices amid supply constraints, surging demand within the AI value chain, and other disruptions. ..........
.... What started (and continues) as a parabolic move in semiconductors is now pulling up stocks that are more directly affected by energy disruptions. Health markers for this rally are poor, but you would expect that when it is so concentrated.
What we’re seeing now is just the acceleration of the “infinite demand at any price” theme that has dominated since 2020.
I could post any number of bear fuel charts whether it is based on breadth, volume, number of stocks hitting 52-week lows etc. There’s no point as the narrative is unlikely to be broken now.
The rally has gone on for long enough now that even impaired markets are starting to get dragged along.
.................... Calling the rise in AI-related stock prices a bubble is just wrong. P/Es are very reasonable. As many have said, if there is a bubble it’s in E rather that P.
I would argue calling the even the “E” part as a bubble is contentious. If you subscribe to the “infinite demand at any price” for AI, then it’s all absolutely reasonable.
You don’t need that much to happen to justify everything we’re seeing.
- All new compute capacity has to approach 100% utilisation. If it does, then hyperscaler margins will be realised and all of the hardware (chips, memory, power delivery etc) would be a great investment. Great margins for all. Ignore the accounting argument about capitalisation of costs. The cashflow will certainly arrive.
- The LLM companies can continue to attract capital to run at a loss, are able to push pricing to break even, or can engineer a jump in efficiency.
It’s just another version of the “infinite demand at any price” coupled with the endless supply of capital. Demand for inference will stay high enough that both capacity will be filled and pricing will eventually be able to adjust.
This is why calling it a bubble might not be appropriate. There very well could be incredible demand as the technology progresses.
This is still a panic rally though. There really isn’t much that’s healthy about this price action. SOX is up 50% this month with no pullbacks. Everyone wants to buy on a pullback. This means it won’t happen. ................
Bubble Fare:
The rebound from the March lows, fueled in part by hopes of easing tensions between the US and Iran and a surge in corporate earnings, has lifted investor sentiment toward what a quantitative model from Bloomberg Intelligence strategists suggests is “manic” territory. The model tracks six components, and three of them have driven it toward that level: high-yield corporate bond spreads, low volatility, and pairwise correlations.
That doesn’t necessarily mean a crash is coming: The backdrop has typically coincided with further gains, albeit at a more modest rate. ...............
***** Hussman: (More) Roses Amid Garbage and Trap Doors
.......... The exuberance of the spectacular now is also evident in the steep valuation of the Nasdaq 100
..................
.................... This forces an almost heretical conclusion I’ve been toying with for a year or two: maybe what we consider “expensive” is anchored to a market regime that no longer exists. Maybe 20x earnings is not expensive anymore because 20 years of future earnings are guaranteed in a way they weren’t 50 years ago. Maybe for dominant, cash-generating businesses, 20x is the new bargain bin. Maybe historical comparisons to decades that lacked passive flows, algorithmic trading, derivatives-fueled volatility, trillion-dollar buybacks, and perpetual monetary intervention are becoming less useful by the year.
........ This doesn’t mean crashes disappear. Something will absolutely break eventually, and probably the moves lower will be sharper and faster, before they aren’t, because that’s what leveraged systems do. But each break seems to justify larger interventions, which creates even bigger distortions, which produce even larger asset bubbles, which eventually require even more intervention. It’s a magnificent ouroboros of financial engineering and moral hazard.
And that’s the truly infuriating part for people like me. I want old valuation frameworks to still work cleanly. I want patient fundamental analysis to feel like an advantage rather than a history hobby. I want “cheap” and “expensive” to retain actual meaning. But markets increasingly feel like they’re operating under a new regime where liquidity overwhelms nearly everything else over long enough time horizons.
“This time it’s different” remains a dangerous phrase because human beings are still perfectly capable of creating idiotic bubbles. But pretending this market functions like the one our grandparents invested in may be its own form of delusion.
If the Fed has effectively made permanent distortion the foundation of modern markets—and if it cannot stop until something truly catastrophic breaks—then maybe we need to admit the obvious: the market is no longer broken. It’s functioning exactly as designed: rigged.
A.I. Fare:
........... Alphabet said last week that it’s planning capital expenditures of as much as $190 billion this year as it invests heavily in data centers critical to its AI goals.
Back in January, just days before the latest private crash swept across markets, we reminded readers that one of the biggest abusers of private credit SPVs was none other than Meta which as of 2025 was "already neck deep in off-balance sheet debt."
Quantum entanglement
The AI “hyperscalers” reported bumper earnings for the first quarter, with both sales and profits beating expectations. But if you look more closely at the P&L, some of them had a lot of help from an interesting line item.
Most of the attention has naturally fastened on to another slew of engorged capex forecasts from Alphabet, Amazon, Microsoft, Meta and Oracle. .............
Accounting nerds and other clever readers will probably have guessed from the pattern what constitutes “other income” in this case: the ebb and (mostly) flow in the valuations of their sizeable private investments in companies like OpenAI and Anthropic. .............
This is another sign of just how comically codependent the AI tech industry has become.
Not only have private investments and increasingly engorged funding rounds become a meaningful driver of the hyperscalers’ aggregate earnings, but the money the hyperscalers have pumped into the likes of Anthropic and OpenAI has allowed the AI companies to sign huge computing deals with Alphabet’s Google Cloud, Microsoft’s Azure and Amazon Web Services.
In fact, The Information has crunched the numbers, and OpenAI and Anthropic now make up about half of the entire cloud computing order books at Oracle, Alphabet, Amazon and Microsoft.
.................. Right. So let me take a step back from all the negativity I’m spouting and grant Sam some positive news. Just anything positive in this AI field.
Don’t say I didn’t try!
There IS a profitable AI company. One that matters, anyway.
It’s Nvidia.
Last quarterly report: $68.1 billion in revenue. Full year revenue: $215.9 billion, up 65%. Net income $120 billion. GAAP gross margin above 70% on the data centre business. A 56% net profit margin. That is a real business, justifying some fraction of its market cap.
Notice though what makes Nvidia profitable.
It isn’t that AI works.
It’s that everyone else THINKS AI works.
Nvidia sells the picks and shovels to a gold rush where most of the gold seekers are losing money.
Anthropic burns cash on Nvidia chips. OpenAI burns cash on Nvidia chips. CoreWeave borrows money to buy Nvidia chips. Meta, Microsoft, Google, Oracle and Amazon between them spend hundreds of billions a year on Nvidia chips. Then Nvidia turns around and invests in those same companies.
So yes, Nvidia is profitable, but its profitability is the mirror image of everyone else’s losses.
And if the cash flow into the pile slows, Nvidia’s revenue will slow.
There is no second customer base. There is no diversified buyer pool. There are the hyperscalers, and there are the hyperscalers’ funded startups, and that’s basically it. ................
.......... someone on X asked ChatGPT Pro to update the circular financing chart from Bloomberg that I include above. The output ChatGPT produced is below.
If you have time on your hands, you can try spot the errors of omission and commission, starting with the omission both of yesterday’s deal Xai-Anthropic deal and the Broadcom-OpenAI deal, and also has some very obsolete valuations. Even so, what’s there (mostly true?) is still pretty wild.
Charts:
1: '
(not just) for the ESG crowd:
UN report predicts crippling heat waves, polluted air, species extinctions, economic crises
Why investing in Earth now can lead to a trillion-dollar benefit for allThe Global Environment Outlook, Seventh Edition: A Future We Choose, the product of 287 multi-disciplinary scientists from 82 countries, is the most comprehensive scientific assessment of the global environment ever carried out. The report calls on all actors to acknowledge the urgency of the global environmental crises, build on progress made in recent decades, and collaborate in the co-design and implementation of integrated policies, strategies and actions to deliver a better future for all.
U.S. B.S.:
Trump is not his own master when it comes to policy—he is merely the front man for implementing a strategy using unsavory means; a strategy aimed at maintaining hegemony that will ultimately target China and Russia—and will likely fail, because the US has made massive miscalculations.
War Fare:
.......... This applies to American elites. They think America is as powerful as it was back during the Gulf War: able to crush opponents. It leads to constant incorrect decisions. The first major one was believing that sanctions would destroy the Russian economy and lead to victory for Ukraine.
The second major error was the second Iranian war. They thought they could easily beat Iran and overthrow its government. Instead all their local bases were smashed, they Strait of Hormuz was closed by the Iranians, their carrier groups forced back, and their one attempted ground action in Iran, to seize Iran’s enriched uranium reserve, was a bloody fiasco.
Since then they’ve tried to escort out ships and retreated. They’ve put on a blockade of the blockade, and Iran hasn’t buckled and Trump in particular keeps spouting on about how Iran is essentially already defeated and eager for a deal even as Iran has repeatedly refused negotiations.
The world economy is shuddering, the price of oil and its distillates are soaring, American farmers can’t afford enough fertilizer and Russia and China turn out to be two of the nations most able to weather the storm.
Woops. ..............
..................... A vast US military buildup in West Asia immediately began, while supposed peace talks with Tehran were ongoing. The negotiations were of course a con, intended to lull the Resistance into a false sense of security before the next phase of Israel’s intended palace coup commenced. On February 28th, Zionist-American airstrikes rained down on Tehran. Israel and the US felt certain Iran’s leadership had been eliminated or scattered, and the Islamic Republic’s command and control system “severely beaten.” But then, catastrophe started to erupt. ............
It turns out that Trump’s plan to help ships go thru the Strait was ended when both Saudi Arabia and Kuwait refused to let the US use their airspace or US bases in their countries to launch attacks.
The reason is obvious—Iran has repeatedly said that if the war restarts they will hit the Gulf States much harder than before, going after oil infrastructure in particular.
America has proved it can’t protect its Gulf allies. It’s low on interceptors, and what they have goes to Israel. Even with interceptors attacks get thru.
Bases have gone from defending countries to being liabilities. Being American allies drew the Gulf states into a war that devastated them. The Sauds and Kuwaitis have nothing to gain from letting the US launch attacks from their territory. The lesson was painful, but it has been learned. ..........
......................... The next year is going to be ugly. Even if the war ended today, which can only happen if the US declares victory and lets Iran, in fact, win, it’d be ugly. But if the closure of the Strait continues, multiple countries will have famines and almost everyone is going to have significantly increased food prices, which means a lot of poor people will go hungry and some will die. It’s great Congress has cut food stamps every few years for the past 30 odd years.
If the war does go kinetic again, Iran will destroy vast amounts of oil infrastructure, and the crisis will go on for years.
The only sane response is to end the war, but that would mean de-facto acknowledging Iran is a great power and the US is no longer a global hegemonic power. ......
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