The economic and profit payoff from the AI buildout has provided investors with nearly uninterrupted fortune since this bull began in October of 2022. After a parabolic top in semiconductor shares on June 22 of this year, continued bull market progress has seemed less certain as tech and non-tech shares jockey for favor. Despite a strong GDP report and superlative earnings releases this week, a fracture formed as credit, equity and boardroom confidence in AI ROI collapsed. Does this signify the end to this bull market or simply the end of the AI hype cycle? For answers, we will need to pit the facts against the frets to determine whether this rally remains.
Markets convulsed this week as mega data releases from governments, central banks and corporations all peppered the tape. Brazil’s market fell 20% as Lula won a surprising re-election. US GDP rose a surprising 3.4% in Q3, but inflation rose even higher at 3.6%. In Canada, the Central Bank raised growth expectations while also raising rates .25%. In the US, Chairman Warsh maintained his forward silence policy while announcing no change in rates, but two cuts to rate decisions. Anthropic provided hotly debatable financial details in advance of its IPO listing, and Magnificent 7 earnings releases drove dramatic performance dispersions on the week. While strategists enjoy parsing such challenging data sprays (I attest), investors usually do not. But fret not! We will quickly sort this for you using the next four charts… and 744 words.
Fret: US Economic Growth is Stalling
US GDP grew a spritely 3.4% in the third quarter powered by robust consumer consumption and business investment. Consider the composition of contributions:
Despite reports of the US consumers demise, household consumption contributed 2.5% to last quarter’s GDP growth and private sector demand accelerated to 4.95%, the highest rate since 2021. Business investment contributed 1.7% last quarter, the highest level since COVID, indicating the AI Boom isn’t stalling; it’s accelerating. Consequently, trade deducted 3.3% from GDP growth as the voracious appetite for foreign-made semis and servers boosted imports to the highest level since the tariff stockpiling in Q1 2025. The only potential negative in the report came from a rise in inventories as this could indicate slowing current demand. If not, it indicates increased corporate purchasing to satisfy future demand. We suspect it’s the latter, as current Q4 GDP estimates maintain pace. Fact: US Economic growth remains robust.
Fret: Corporate Earnings Growth is Stalling
S&P 500 earnings have grown a spritely 30% in the third quarter powered by robust consumer consumption and business investment. Consider the composition of contributions:
While technology company earnings have contributed mightily, nearly every sector but one will produce positive earnings results. And while Energy (136%), Tech (66%), and Communications Services (40%) account for much of the S&P 500’s 30% growth, 7 out of the 11 sectors have an earnings growth rate above long-term average. Yes, much of the earnings growth may be AI tech related but it’s benefiting a variety of sectors. Also recall this: these earnings relate to the construction of AI, we have yet to see earnings growth from the utilization of AI. Even in our own firm, our time and expense on AI hasn’t driven profits or productivity… because we haven’t turned it on yet. This will happen early next year which will enable us to comment on the benefits beyond the costs. Analysts have incorporated this micro example into their macro expectations as forward earnings expectations continue to rise across all company sizes:
Fact: US Corporate Earnings growth remains robust.
Fret: The Bull Market is Over
Within markets, sentiment swings often overwhelm fundamental things. Despite superlative earnings trends consider the following list of cohort drawdowns from most recent highs as of 10/29:
Now, let price tell the tail starting from the bottom. Neoclouds are companies that borrow money to build data centers to sell compute to future customers. Without a steady supply of abundant credit, they asphyxiate. Dynamic Random Access Memory or DRAM companies sell specific semi-conductors required for AI. More supply than demand for these chips has lifted prices but also incentivized more capacity and more competition. While Neoclouds depend on credit, semiconductors depend on hyperscalers like Google, Amazon, and Microsoft. These AI factory builders all have base businesses that support their huge Capex budgets. Google has advertising, Amazon has retail, and Microsoft has software. Within their earnings reports their data center businesses have performed well but AI has started to disrupt their base businesses. Google search now competes with AI chatbots, Microsoft software may monetize fewer AI powered subscribers, and Amazon e-commerce will compete with AI agent shoppers like Muse. Innovators Dilemma: the buildout of their Data Center businesses supplies the technology which may cannibalize their core base businesses! Recognition of this business reality accompanied with falling into negative free cash flow yields has increased concern and skepticism within the credit markets, equity markets, and the boardrooms themselves. Hype has now flipped to skepticism, amounting to a sentiment crash despite the earnings rally. Fortunately, revisiting our chart from above, investors aren’t abandoning the market, just the AI related companies of concern. The X-Magnificent 493 within the S&P 500 and the equal weight version of the S&P 500 itself sit just below all-time highs. Lastly, investors concerned about “cash burn” have turned their attention to high free cash flow, dividend provider companies known as “cash cows”. Note my COWS ETF proxy above, or the Amplify Cash Flow Dividend Leaders ETF, which sits at all-time highs.
Fact: The Bull Market isn’t over, but the AI hype phase has ended.
Companies and strategies with stalwart balance sheets, high free cash flow and real AI ROI will continue to attract capital within this expanding economy. But as capital gets more discerning, many AI storytellers will likely starve. Less hype and more discipline shouldn’t panic investors, it should please them! We still anticipate Santa’s arrival... but not everyone will get toys this year.
Have a great Sunday!
-David
David S. Waddell, CFP® CEPA®
Chairman, Chief Investment Strategist
David Waddell is Chairman and Chief Investment Strategist at Coastal Bridge Advisors, where he chairs the firm's investment committee and helps guide portfolio strategy through macroeconomic analysis, market research, and risk assessment. With nearly three decades of experience, he is a nationally recognized commentator on economics and investing, with appearances on CNBC, Bloomberg, Fox Business, and Barron's. David is a CERTIFIED FINANCIAL PLANNER™ professional (CFP®) and a Certified Exit Planning Advisor (CEPA®). He holds a BA in Economics from The University of the South and an MBA in Finance and Investments from Babson College.
Sources: YCharts, Yardeni Research, Sethi Associates, FactSet, US Bureau of Economic Analysis
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