Sharpening the Pins: The AI Bubble, Debt Insurance, and Midterm Paralysis

Sharpening the Pins: The AI Bubble, Debt Insurance, and Midterm Paralysis

Has the AI bubble burst? Well, last week the pins were certainly being sharpened.

In fact, since August, stock markets have been largely flat. Even when a new high was made, it was not followed up by further gains. As markets stay flat without establishing new upward momentum, the risk of a broader pullback increases—especially with inflation and affordability acting as major issues for voters, and the Federal Reserve governors maintaining their ongoing concerns about inflation and interest rate increases.

Debt Danger and the Anthropic IPO

In a glaring danger sign for the AI trade, the cost of insurance on debt issued by these companies is becoming very expensive. Will the grand promises of artificial intelligence actually come to fruition before the debt comes due?

It is difficult to know whether the AI trade is done, especially with the Anthropic IPO pending. There is great anticipation about the IPO, and many doubts were raised in regard to the risks of the offering.

For a closer look at the macroeconomic forces squeezing the tech sector, CNBC released a timely analysis this weekend on how oil and bond yields are colliding with the AI market.

Midterm Paralysis and The Great Rotation

Also, with the midterms this week, it is unclear how markets will react. Typically, markets are pleased by the paralysis that comes with a divided government. We will see if this plays out as previous divided governments have.

As the market leaders shift, diversification pays dividends. Outside of the AI Magnificent 7, other parts of the market such as Value, International, and Mid- and Small-Cap domestic equities might provide essential diversification.

During the month of August, oil prices came down and so did interest rates. Will that continue in November and through the end of the year?