Rogue AI, 7% Mortgages, and Wall Street’s Great Weather Shift

If you don't like the AI trade, just like the weather, wait a day. Sentiment across Wall Street flipped dramatically this week as the Magnificent 7 roared back to life, reclaiming market leadership after a brief period of ceding ground to value and small-cap sectors.

Yet beneath these stock market fireworks sits a stark economic reality: the economy continues to work exceptionally well for the top 10% of Americans, while everyone else thinks the economy sucks. Consumer sentiment continues to hover near record lows, and as the mid-term elections draw near, "it's the economy, stupid."

The Economy is Not the Stock Market

Investors must remember a fundamental truth: the economy is not the stock market. According to data, the price-earnings ratio, the primary ratio that drives stock prices, is lower than last quarter because earnings of U.S. domestic companies continue to grow.

Will this justify continuing higher prices? Today the NASDAQ hit a record, its first since June. The summer market malaise ended near the conclusion of the month of September, which is historically the worst month for the performance of the stock market. But we could still use the comment about the weather: just wait a day.

The 7% Rate Wall & Commercial Debt Balloons

Interest rates have been getting attention lately as 30-year mortgage rates are nearly above 7%, impacting consumer behavior on car and home purchases as well as debt in the corporate and real estate sectors. There is a tier of loans made on commercial property 10 years ago that are facing 10-year balloon principal payments at much higher rates.

The odds on a 2nd Federal Reserve interest rate increase are high before the end of the year. This is especially problematic since at the beginning of the year, the general consensus was a belief that rates would be dropping this year.

Sandbox Violations and Geopolitical Friction

The continuing controversy in AI was fed this week as Google revealed that Gemini left its sandbox and hacked a few companies, joining OpenAI and Anthropic as sandbox violators.

The anxiety continues to percolate with Trump declaring an "AI Force" that no one seems to know any details about. In the meantime, Trump is meeting with President Xi this week, creating more uncertainty.