We’re coming out of one of the most violent semiconductor rallies in history, and everyone is wondering if semis are overbought. SOX is up 65% year-to-date, posted its longest winning streak in 32 years, and ran 47% in 18 trading days. Earnings season was extremely strong. And the bubble calls are getting louder by the day. Burry has loaded up on puts. Your favorite macro guy is saying markets have lost all touch with reality and we are at peak cycle hysteria…

They might be right, but they’re asking the wrong questions.

Whatever happens in the next two weeks or two months is a sideshow to what the advent of AI actually means for markets and the world. And what AI represents is the most important development in economics in 200 years.

The war between capital and labor is ending. AI is what ends it. Labor is losing in a way it has never lost before and that stands to reshape markets and investing forever.

The Capital-Labor Cycle

The global economy is fundamentally a negotiation between two factors: Capital, which provides tools, land, and money, and Labor which provides time, effort, and skill.

Economic history is the drama of how the value they produce together gets divided.

For most of recorded history that negotiation was tilted one way or another, flipping back and forth with recent events.

After the Black Death wiped out a third of Europe’s population, labor briefly held all the cards. Peasants demanded wages, abandoned manors, and watched serfdom crumble. By the Gilded Age, capital had reclaimed the upper hand so thoroughly that a handful of industrialists had their own private armies. The postwar period swung the pendulum back: unions had teeth, real wages tracked productivity, and the median family could buy a house on a single income. Then around 1980 the pendulum reversed again, and we’ve been living in capital’s afternoon ever since, watching the labor share of GDP grind lower decade after decade.

This oscillation is a huge part of the historical debate between economists. Marxists, classical economists, and supply-siders disagree on almost everything, but they agree on the framing. Whether you read Ricardo, Piketty, or Friedman, you’re reading some variant of the same fight.

Marx had the most ambitious solution. His prescription was that labor would eventually seize the means of production and end the negotiation by abolishing one of the parties. The proletariat would own the tools it used. Game over, with labor on top forever.

But, that isn’t what happened. Marx assumed labor would always be necessary to operate capital, and the assumption held for the entire industrial revolution. Every wave of automation, from the spinning jenny to the industrial robot, displaced specific tasks while creating new ones, because a human was always needed somewhere in the loop. A weaver lost her job; a machine operator gained one. A bank teller was replaced by an ATM; a software engineer was hired to maintain the network. The aggregate share might shift at the margin, but labor stayed structurally indispensable. You needed humans to run the capital.

Every previous productivity revolution was therefore, at best, only a partial victory for capital. A reallocation, not a routing.

AI is something different.

The Truth About AI

Most people think of AI as just another technology, similar to the steam engine, electricity, and the internet as a general purpose technology, with the familiar pattern repeating: workers displaced, workers retrained, prosperity rises, the system absorbs the shock.

This view misses an important difference about AI.

Every prior automation wave automated specific muscle movements, motions, or calculations. It substituted for the body and for the most mechanical parts of the mind. The seat of judgment, taste, synthesis, language, and reasoning remained the exclusive property of humans, and as the lower rungs of the cognitive ladder got automated away, humans simply moved up the ladder.

AI is aimed squarely at replacing all rungs of the ladder, but especially the ones that automation has never touched before. The diagnosis. The strategic call. The judgment that used to belong to a senior partner. The synthesis that justified the corner office.

There’s an obvious objection here. Every previous technological revolution also obsoleted whole job categories, and every revolution created new ones to absorb the displaced. The steam engine didn’t envision software engineers. The internet didn’t envision prompt engineers. Why should this time be any different?

The difference this time is specifically how general the automation will be. Artificial General Intelligence seeks to replace humans across all applications. New jobs required new skills, but those skills lived inside human heads, and the heads were previously the bottleneck.

And don’t assume physical labor is the refuge. Robotics has been “five years away” for decades because the bottleneck was never the hardware. It was the brain. Perception, planning, dexterity, the judgment to handle the long tail of edge cases every real-world job throws at a worker. That’s what has held up the physical-labor automation wave for half a century, not the cost of servos or the precision of actuators (and to the extent the servos and actuators have been a problem, artificial design systems can solve that too).

The skyrocketing capability of AI is that brain. Whether general-purpose humanoids arrive in three years or ten, they arrive. And well before then, narrow systems will eat specific physical jobs the same way they’ve started eating specific cognitive ones. The carpenter and the programmer face the same problem on different timelines.

Once the substitute for human cognition becomes a line item on a capex budget, the structure of the labor market will change. In equilibrium, wages equal the marginal product of labor. Introduce a substitute whose capability rises every year and whose unit economics are dominated by capex (chip fabs, data centers, training runs), and the marginal product of human labor for any given task collapses toward the marginal cost of the substitute. The wage collapses with it, task by task and role by role.

Labor stops being a separate factor of production and starts becoming a particular form of capital, machinery you can buy by the GPU-hour. The negotiation between capital and labor doesn’t shift. It dissolves.

This is the prediction Marx couldn’t see, because he couldn’t conceive of capital that didn’t need labor to animate it. His theory of value rested on labor as the thing that made capital productive. Remove that premise, not just at the assembly line but at the cognitive level, and his framework still applies, but only to a world that no longer exists.

Where Marx Was Right

Marx was wrong about the path, but he was actually kind of right about the ending.

He predicted a world where scarcity was “solved” by humanity. Humans would be freed from work because the machines did everything. He thought labor would inherit this paradise by seizing the machines, creating a socialist utopia.

Instead, capital is seizing labor and creating a capitalist utopia.

The central political and economic question of the coming decades won’t be how to divide output between capital and labor. That question is closing. The new question is which capital will have the most leverage, and what to do with the people who used to be the other half of the equation.

Investing For The Future

If you’re reading this newsletter you’re probably less interested in the political philosophy and more interested in what to own.

The answer follows directly. If labor’s share is going to compress and capital’s share is going to expand, the natural place to look is at capital that produces the substitute for labor. Right now, that capital is accruing in three places:

1. Compute owners (hyperscalers). The handful of companies operating the data centers where the substitute actually runs.

2. Hardware providers. The picks-and-shovels layer: chips, memory, interconnect, packaging, the equipment makers behind them.

3. Frontier labs. The model builders themselves, where the cognitive substitute is being created.

But the point is not just to rehash the obvious “own AI” trade and move on.

The point is that if AI turns cognition into capital, then the companies that own the capital layer are not just participating in the next tech cycle. They are becoming the new claims on the future income stream of the economy.

That is the real reason the AI trade is so strange. On normal cyclical metrics, a lot of this looks insane. The stocks have run too far. The earnings revisions are too aggressive. The capex numbers are too large. The narratives are too clean. All of that may be true.

But if the underlying shift is real, then the market is not just paying for another semiconductor cycle. It is paying for a world where more and more of what used to be paid out as wages gets redirected toward compute, chips, memory, power, models, and distribution.

That does not mean every AI stock is a buy. It does not mean valuation no longer matters. It does not mean there won’t be brutal drawdowns, failed projects, overbuilt capacity, or periods where the whole thing looks ridiculous.

But it does mean the right question is not simply whether semis are overbought.

The right question is whether the market is beginning to price the capitalization of labor.

If it is, then the imperative is clear: focus on the assets that make labor less necessary. The companies manufacturing the hardware bottlenecks. The infrastructure builders. The companies that turn human judgment into a software expense and human output into a compute workload.

Marx thought labor would seize the means of production.

Instead, capital is building the means of replacing labor.

That is the final triumph of capital.

And that is the real AI trade.

Disclaimer: The information provided here is for general informational purposes only. It is not intended as financial advice, and is not a recommendation or offer to buy any securities. I am not a financial advisor, nor am I qualified to provide financial guidance. Please consult with a professional financial advisor before making any investment decisions. This content is shared from my personal perspective and experience only, and should not be considered professional financial investment advice. Make your own informed decisions and do not rely solely on the information presented here. The information is presented for educational reasons only. Investment positions listed in the newsletter may be exited or adjusted without notice.

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Last week was an interesting and chaotic one, with the final S&P 500 result of +.07% doing little justice to the swings.

The Nasdaq had a slightly worse week, finished down ~22bps.

Part of the reason for the mismatch between how traders felt last week and how the indices did is because we ripped Monday with SPX closing up ~150bps and NDX closing up ~200bps.

On top of that, retail-heavy names took a serious beating from those Monday highs.

Non Profitable Tech off 8%, Retail Favorites off 5%, Memes 4.38%, etc. means there was a lot of pain among the High Beta Boys (HBBs).

In the factor world (link if you don’t have a good grasp on factors), Momentum and Liquidity (highly traded names) took a back seat to Low Vol and Quality, which means that any form of “hot money” got waxed.

In fact, “High Beta Momentum” had its worst day Thursday since “DeepSeek Monday.”

So while the indices may have closed mostly flat, chances are you felt the pain yourself.

Set Up For Vol

Momentum unwinds are simply a feature of the modern markets. Because there is research showing that momentum is one of the few factors that produces durable “alpha” there is a lot of money that follows the momentum factor. That contributes to these miniature “boom and bust” cycles, or as calls them “rolling bubbles” (or as calls the, “rolling ponzis”).

And it makes sense to have had one of these some time in Q4. For one, Q4 seasonality is not great for momentum on the whole.

Liquidity on the whole is also drying up a bit. It’s a complicated subject, but has been projecting it to fall through 2026 before rebounding.

And the Fed had a “secret meeting” with Wall Street last week over the repo spike and money markets, implying that there is some stress there.

All of this has predisposed markets to a wobbly period, and it likely all contributes to why the VIX is staying elevated.

More Vol Ahead?

This week is monthly OpEx, and while I don’t believe it’s a particularly large one dealers are heavily short Gamma going into Monday.

When dealers are long Gamma they tend to hedge against moves, buying as the market sells, and selling as the market buys. When the are short Gamma they do the opposite, chasing moves and exacerbating them.

Also, the December Fed meeting has moved from almost a sure cut, to now a 55/45 “no-cut” projection. If the market continues to price out cuts, that could be a headwind for equities.

On the more protective front, it appears the TGA buildup is now behind us. Rather than the Treasury General Account pulling money “out” of the economy (a simplistic explanation but suitable for our needs) it should now begin pushing money IN to the economy.

But we also have a heavy event schedule this week, with NVDA earnings Wednesday, September (you read that right) Non Farm Payrolls releasing Thursday, and Gemini 3.0 expected sometime this week…

Gemini 3.0 is expected to be the new best in class LLM model. After a relatively disappointing GPT-5 release, all eyes will be on Google to see if they can honor the scaling laws and keep the models moving forward.

The State of the AI Trade

AI has been the source of a lot of unease the last few weeks. Sama made a rare public misstep in his Brad Gerstner interview, the AI stocks drew down heavily, and the chatter about a “debt fueled capex bubble” reached a fever pitch.

There are growing risks in the AI trade, one of which I highlight above: Gemini 3.0 disappointing and “popping” the bubble of model improvement expectations.

But the reality is that the earnings expectations for AI companies continue to get revised up.

The hyperscalers made it clear that they plan to spend more than ever in 2026.

And while the Big Tech firms’ free cash flow is decreasing to fund these capex expectations the idea would be that this capex is ROI positive. Plus, they’ve managed to avoid lowering buybacks by taking on debt.

My Vibe and My Trades

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More than 65% of the S&P500 have reported earnings, and their results have deviated meaningfully from recent history.

More companies are beating consensus estimates than anytime since immediately after COVID.

But they are beating by significantly smaller amounts than in recent history.

Look at Q2 2024 on the chart above. Then compare it to NDX’s performance in that same period on the chart below.

Not great.

It’s already manifesting a bit like Q2 2024 in other ways as well. Companies that are beating on earnings are not being rewarded for it compared to history.

When market expectations are high and results are good but not great you end up with some disappointed investors.

I don’t necessarily think we will see the same drawdown we saw in Q2 24’ off of this, because whereas in 2024 there was still deep lingering fear of a recession after the 2022 rate hiking cycle, we have a much more structurally optimistic investing environment this time around.

Still, these little cracks showing add up and are worth watching. The market is often willing to shrug them off until they either go away or you reach a critical mass.

Employment

We continue to only see limited employment data due to the government shutdown, but the private ADP data we see shows continued slowdown.

You know what would be ironic is if ChatGPT release caused companies to realize that AI was coming for the jobs and slow hiring, thereby causing a recession that sets AI back 5+ years!

There is a confounding variable surrounding all this employment data in the immigration policy changes, but we need to see the job market hold steady or even the so-far-untouchable AI sector could start to wobble.

AI Themes

Last week was a big week for the AI story. With all reporting earnings and commenting heavily on AI infrastructure and technology on their earnings calls we got a good look at the state of the theme.

If you missed my Meta update, you should check it out here:

AMZN and GOOG were the big winners of the week each up ~7%.

What’s notable is that they are also the two biggest spenders on capex.

And generally across the whole hyperscaler complex the capex guides have substantially beaten expectations!

So the hyperscaler theme is certainly alive and well, despite what happened to Meta. There appears to be a growing preference for companies that are directly monetizing their massive capex, and GOOG and AMZN both fit the bill there with huge cloud revenue growth, and in Google’s case, the chance to have a leading-edge model as well.

An interesting tidbit also got thrown out by Microsoft CEO Satya Nadella. Satya, when asked by Brad Gerstner about a potential for a supply glut, responded:

I think the cycles of demand and supply in this particular case, you can’t really predict, right? The point is: what’s the secular trend? The secular trend is what Sam (OpenAI CEO) said, which is, at the end of the day, because quite frankly, the biggest issue we are now having is not a compute glut, but it’s power — it’s sort of the ability to get the builds done fast enough close to power,” Satya said in the podcast. “So, if you can’t do that, you may actually have a bunch of chips sitting in inventory that I can’t plug in. In fact, that is my problem today. It’s not a supply issue of chips; it’s actually the fact that I don’t have warm shells to plug into.”

In other words, Satya is no longer chip-constrained but “warm shell” (powered and ready datacenter) constrained. The market has begun to rapidly reprice some datacenter/power related companies higher this year, but Satya’s recent comment is likely to propel that forward in earnest.

I get into more on that in the Trade Ideas section below.

Trade Ideas

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Both Google and Meta reported earnings yesterday after the bell, and to say that the stocks had different reactions would be an understatement.

Meta dropped sharply by about 10% and continues falling during the call and overnight.

I was a bit surprised by this reaction. After adjusting out a one-time tax payment due to the One Big Beautiful Bill Meta’s headline numbers weren’t bad.

The Numbers

*REV. $51.24B, EST. $49.59B

*EPS $1.05 VS. $6.03 Y/Y

*ADJ EPS $7.25 vs $6.03 Y/Y (Adjusting out the one time payment)

*SEES 4Q REV. $56B TO $59B, EST. $57.38B

*SEES FY CAPEX $70B TO $72b, SAW $66B TO $72B, EST. $69.3B

*EXPECTS CAPEX DOLLAR GROWTH NOTABLY LARGER IN 2026 VS 2025

Looking at these headlines two things stand out. Firstly, Meta’s 4Q projections were roughly in line, and secondly they are expecting capex to grow “notably larger” in 2026.

Digging deeper, Meta’s Family of Apps revenue is actually growing faster than Google Search revenue, and has been at an increasing rate since 2023.

So while Google had an excellent quarter the Meta cash machine actually seems to be spinning up faster than Google’s core business, while operating margins are expanding at a similar pace.

The problem, then, is on the expense side. Meta warned that 2026 capex would be “notably larger” and that expenses would grow “at a significantly faster rate” compared to 2025.

To put that in context let’s take a look at how Meta is using their existing compute.

AI in the Core Business

To understand whether the capex plans are bullish, bearish, or something in between let’s take a look at some of Mark’s statements on the earnings call.

Meta Superintelligence Labs is off to a strong start. I think that we’ve already built the lab with the highest talent density in the industry. We’re heads down developing our next generation of models and products, and I’m looking forward to sharing more in that front over the coming months. We’re also building what we expect to be an industry-leading amount of compute.

Now, there’s a range of timelines for when people think that we’re going to get superintelligence. Some people think that we’ll get there in a few years. Others think it will be five, seven years or longer. I think that it’s the right strategy to aggressively front load building capacity so that way we’re prepared for the most optimistic cases. That way, if superintelligence arrives sooner, we will be ideally positioned for a generational paradigm shift and many large opportunities.

If it takes longer, then we’ll use the extra compute to accelerate our core business, which continues to be able to profitably use much more compute than we’ve been able to throw at it and we’re seeing very high demand for additional compute, both internally and externally. And in the worst case, we would just slow building new infrastructure for some period while we grow into what we build.

Pulling this next part out separately as I think it’s the key to understanding Meta’s capex plans.

And one way that I think about our company overall is that there are 3 giant transformers that run Facebook, Instagram and ads recommendations. We have a very strong pipeline of lots of ways to improve these models by incorporating new AI advances and capabilities.

Let’s break down what Mark is saying.

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Markets broke out to ATHs to end last week, and futures have opened even higher this evening in New York.

There are two common narratives I hear surrounding “ATH breaks” in equities. Some people claim that ATH breaks are bullish and should be bought, others see high prices and think they want to wait and buy lower.

JPM did an analysis of past ATH breaks since 1970 and discovered that buying them is basically the same as buying at any other time. They are ever so slightly more bullish than average on a long-term basis, and slightly less bullish than average on a short term basis. More importantly the data is close enough so as to likely be just noise.

Don’t fear the ATHs.

On the seasonality front, last Thursday was the single best day of the year (historically) to buy stocks on a 3-month forward return basis.

Seasonality is very bullish here, with a huge number of S&P stocks coming out of their blackout periods and beginning to repurchase their shares into EoY.

Positioning

Positioning continues to surprise me. Goldman is modeling L/S investors as having high gross exposure but quite low net exposure. This is interesting because a high gross exposure implies that they are confident of a lower volatility regime (bullish) but are choosing to keep net exposure low (bearish).

Meanwhile, long only investors have been buyers since the April bottom but not at extreme levels. Hedge funds continue to doubt the rally and continue to be net sellers.

This has really been a retail-driven market, and that trend seems likely to continue into Q4 and even into 2026 if Goldman’s forecast is right.

Earnings Season

Earnings season is well under way and this week is a big one with ~35% of the S&P 500 reporting.

So far we’ve seen a steady string of earnings beats, although I would say that was largely expected by the investors I talk to.

This is an interesting chart showing that we are in a somewhat unique moment where EPS growth is outpacing P/E growth without a rate hiking cycle.

We’re also in a period of dramatically expanding margins for the S&P500. Anyone who talks about P/E ratios being at “ATHs” without discussing this magin-growth story is larping.

My Vibe

ATHs aren’t magic, but seasonality and buybacks lean bullish, positioning still (somehow!) leaves plenty of dry powder, earnings breadth is decent, and margins are expanding.

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The absolute worst genre of finance post is the Omega Doomer post where the writer tells you some equivalent of “we’re all gonna die” that invariably never actually happens.

These posts proliferate though, not because they are valuable or make anyone money, but because they appeal to something in human nature that keeps us always looking over our shoulders.

Sometimes that instinct can save us a lot of money, and sometimes it just leads us into buying expensive puts that go to Put Heaven™️.

But it was that instinct that led me to dig into what’s going on in markets, and is leading me to write what is essentially a full-blown doomer crash post. The same post you’re reading right now.

And I think this one might be different from its peers in that it actually holds some alpha.

Vol is creeping, credit is wobbling, and record October Opex creates gap risk into Monday. So strap in and get ready for a good old fashioned Halloween-themed DOOM post.

Heightened Crash Risk

Last Friday Trump threatened a 100% tariff on China that sent markets into a tailspin. SPX promptly sold off 300bps intraday, bitcoin crashed 12% and long bonds rallied 70bps.

Markets initially rallied on Monday after Trump TACO-d in a Truth Social post telling us “not to worry” about China.

But since that “truth” markets have remained choppy, and more interestingly, VIX has been progressively bid up throughout the week.

On Thursday we got word of some surprising credit charge-offs by Zions Bancorp that sent regional banks into a tailspin, and the ETF had it’s worst day since Liberation Day.

A $50m write-off for some bank in Utah is hardly immediately relevant to global financial markets in itself, but it is worrying because it comes on the tails of some other recent credit events, and it represents a big loss for Zions.

But there have been signs of stress in the debt markets for a while now, they’ve just gone largely unnoticed because credit spreads have been stable.

Other Signs of Stress

Over the last few years credit has moved more and more into opaque “private credit” markets. In 2024 private credit assets under management reached $1.7 trillion, and it’s only grown since then.

That has made it difficult for investors like us to get a window into how corporate credit is actually performing. Private credit funds are under no obligation to mark their securities to market in real time, and even when they do mark to market they have no mechanism for finding a “true” price.

But we can look at a relatively obscure corner of the market for clues.

Business Development Companies are publicly traded funds that make loans to small and mid-sized U.S. companies, and then pass most of the interest they collect back to shareholders as dividends. Think “publicly listed private-credit funds.”

And they’ve been getting clobbered for months now.

Alternative asset managers like PE funds, which are also a proxy for the opaque world of corporate debt and the “real economy” have started to get beaten down as well.

And the two year yield (a bellwether for the economy) has been down only for months now.

On top of all of this, Gold has been going absolutely parabolic. Gold may not be saying anything that’s relevant to equities, but it sometimes has in the past.

Enter…

Black Monday Redux (The Spooktacular)

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Author’s Note: I will continue releasing free content where I can provide value to everyone. Posts will include premium content for paid subscribers at the end of emails or as separate write-ups. Free content will focus on macro views, whereas the paid content will focus more on the tactical trades I’m making.

Serious traders or investors should join Premium to get the best, most timely information.

Since last week’s note where I said we were heading for “another leg higher” we have seen… another (small) leg higher.

A 2% week is nothing to sneeze at.

I don’t have a lot more to say on positioning or near-term direction at this time, but I wanted to write you guys a note to discuss whether the AI trade is likely to run out of steam.

The Math Behind The AI Trade

Kuppy (of all people) wrote an interesting note this week on the AI trade. In it, he made a few interesting claims which I’ve clipped for you.

Basically, Kuppy is flagging what many people have been flagging recently: the math behind the “AI trade” stretches belief.

I’ve been a huge AI bull throughout this newsletter, and while I think the market has possibly more than caught up to my beliefs, I wanted to check in on the math myself. So I did some research.

You can think of the AI “economy” as having three broad pillars.

Pillar #1 is the big one everybody thinks of: Capex. It’s what the hyperscalers and others are spending to build those massive data centers like this one was kind enough to make a video of:

Pillar #2 is how the capex spend monetizes. Large providers sell data center compute largely to other massive AI companies like OpenAI, Anthropic, the hyperscalers themselves, etc.

Pillar #3 is what really matters, as it’s the revenue earned by the application layer. It’s the amount of money all these companies spending hundreds of billions to rent AI services from the infrastructure layer are actually able to earn in the software marketplace.

Let’s take a look at the numbers.

Pillars of the AI economy.

Pillar #1: 2025 AI Capex (The Input)

• Total: $350–400B

• Amazon: ~$100B

• Microsoft: ~$80–89B (FY25)

• Alphabet: ~$75–85B

• Meta: ~$66–72B

• Oracle: ~$21–25B

• “Other” DC builders (neoclouds, telco, regional): ~$10–20B

Pillar #2: 2025 AI Compute Revenue (The Tollbooth)

• Total: $55–70B

• AWS (AI-attributed share): ~$25–30B

• Azure (AI-attributed share): ~$12–18B

• Google Cloud (AI-attributed share): ~$6–10B

• Oracle Cloud (AI-attributed share): ~$3–5B

• Independent GPU clouds: ~$5–6B
  CoreWeave ~$4.9–5.1B, Lambda ~$0.5B, Together ~$0.1B

Pillar #3: 2025 AI Application Revenue (The Outside Money)

• Total: $32–55B

• Independents, illustrative split:

  • OpenAI: ~$13B

  • Anthropic: ~$3–6B run-rate (2H25 basis)

  • AI coding tools: ~$1.5–3B (Copilot + Cursor, etc.)

  • Creative/search/chat apps: ~$0.6–1.0B
    Midjourney ~$0.3–0.5B, Perplexity ~$0.1–0.15B, Character.AI ~$0.03–0.05B

• Enterprise “AI attach” (incremental to suites): ~$7–15B

  • M365 Copilot, Salesforce, ServiceNow, Adobe Firefly, etc.

Looking At The Long Term Math

We need to see Pillar #3 grow substantially to justify this capex spend. Let’s look at the current CAGR for this segment.

If we take a 55% growth rate on the software side, and a 15% growth rate on the capex side (which is actually a slowdown, considering replacement costs at a 5 year useful life), we see that the complex remains firmly money negative through 2030.

If you look at the cumulative numbers, you see that a $2T gap means trillions are incinerated to produce ~$1T in value.

What Does It Take To Make The Math Work Out?

Put simply we need to see higher growth in Pillar #3 businesses. Using a 75% CAGR gets us to nearly breakeven by 2030.

Using a 85% CAGR for software growth gets us even more firmly positive in 2030.

Achieving this level of growth is not impossible, but it means we need to see Pillar #3 revenue accelerating upwards from here. Furthermore, AI Software revenues will need to more than DOUBLE the entire cloud software industry of today by 2030.

Takeaways For The AI Trade

Put very simply, ~$400b is being spent to develop data centers that are expected to rent for ~$65b this year. The companies renting that data center space expect to earn between $40b from “outside” of the AI complex.

This requires explosive revenue growth from AI software providers to justify. Continuing to grow at the same pace is not enough. One of three things will happen:

1. AI software revenue growth increases dramatically enough to keep the party going.

2. AI software revenue growth increases, but not fast enough to justify the current capex. Hardware providers will be hit hardest, while cloud software providers will benefit form over-the-top capex spending driving their costs down.

3. AI software revenue growth stays flat at 55% or decreases, and the entire complex of “AI” companies has to be dramatically rerated downward.

The conclusion is simple: Even for an AI bull like myself, it seems impossible for the AI trade to play out as immaculately as the market expects.

The problem is that this fact is not immediately actionable. It’s not enough to think that the current AI projections are wrong. Contrary to pop culture, trading is not about being early to a thesis, putting the trade on, and waiting for the market to catch up. That’s a good way to go broke!

“AI” is likely to continue to run from here.

While everyone is watching the capex spend, I’ll be carefully watching AI associated revenues. If we don’t see continued acceleration it could mean trouble ahead.

Good luck out there.

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Disclaimer: The information provided here is for general informational purposes only. It is not intended as financial advice. I am not a financial advisor, nor am I qualified to provide financial guidance. Please consult with a professional financial advisor before making any investment decisions. This content is shared from my personal perspective and experience only, and should not be considered professional financial investment advice. Make your own informed decisions and do not rely solely on the information presented here. The information is presented for educational reasons only. Investment positions listed in the newsletter may be exited or adjusted without notice.

Author’s Note: I will continue releasing free content where I can provide value to everyone. Posts will include premium content for paid subscribers at the end of emails or as separate write-ups.…

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Author’s Note: I will continue releasing free content where I can provide value to everyone. Posts will include premium content for paid subscribers at the end of emails or as separate write-ups.…

Read more

Author’s Note: I will continue releasing free content where I can provide value to everyone. Posts will include premium content for paid subscribers at the end of emails or as separate write-ups. Free content will focus on macro views, whereas the paid content will focus more on the tactical trades I’m making.

Serious traders or investors should join Premium to get the best, most timely information.

These have been weird markets to trade, and I haven’t really been sure how to write about them.

Jerome Powell’s moment to shine came and went this week. Reporters asked a lot of questions and Powell stretched the English language’s ability to say “I don’t know.”

From there, focus shifted to the first trade deal (the first of many, if you believe Trump) which was announced this morning. The 10% baseline tariffs remained with carveouts for various industries and companies (Rolls Royce enjoyed a nice carveout and a health round of glazing by Trump and the UK ambassador).

One might have thought that if our “oldest ally” (Trump’s words) couldn’t get the baseline tariffs below 10% then that would be an unpleasant surprise for markets. But that wasn’t the case, as the event included plenty of bullish rhetoric from Trump including:

You better go out and buy stock now.

• Trump, today

Markets ate it up for a while but couldn’t sustain the big into the close. They finished the day little change after gapping up.

I’m taking Trump at his word for now.

Technically Interesting

The DXY broke out of it’s downward grind. Is this the end of the end of American Exceptionalism? Possibly. I think the world is ready to be surprised by just how resilient the United States’ economy, people, and oh yea, 7% fiscal deficits are.

The big green candle today in the DXY does imply that there may be a line forming of foreigners looking to do business with the US’ markets. Surprise, surprise.

Is old Klaus taking an interest in the US again?

Meanwhile, somehow, sentiment is still quite stretched to the downside. The AAII bulls - bears index remains only modestly off the lows.

McElligot said it best this morning:

There have been a lot of mechanical factors driving a bid beneath the surface this week. Vol Control funds, and CTAs have bought as corporate buybacks have begun as a continued influx of retail buying has push a lot of capital into relatively illiquid markets.

The most recent charts I’ve seen have shown hedge funds to still be under-exposed. There is a ton of capital that is now staring at this rally wondering if it’s time to jump aboard but too scared of the state of the economy to do so just yet, because…

The Economy Is Definitely Slowing

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Author’s Note: I will continue releasing free content where I can provide value to everyone. Posts will include premium content for paid subscribers at the end of emails or as separate write-ups. Free content will focus on macro views, whereas the paid content will focus more on the tactical trades I’m making.

Serious traders or investors should join Premium to get the best, most timely information.

First, a little housekeeping. I’m constantly thinking about how to make this newsletter better and I was hoping to get a little feedback from you guys. Please take a second and answer the poll.

Markets had a good week last week with the NDX and SPX both closing meaningfully higher.

The upward momentum was made even more dramatic by the fact that it came in the last 4 days of the week, as Monday closed pretty red.

Zooming out, we are around 17% off the lows in NDX and 14% off in SPX. Wow.

Importantly we are also above the “post-pause” S&P highs marked on yellow in the chart. That corresponds to roughly the 5500 level in ES, which is now a big psychological pivot point. People will be looking for ES to hold above 5500 to get bullish again, or fall below it to get bearish again.

We can expect some Soros-style reflexivity around that number. In other words, higher prices might beget higher prices for a while, and vice versa.

In The News

Headlines this week were interesting in the sense that there were as many “positive” headlines as possible without anything actually happening.

It’s pretty clear that the administration is afraid of the cat they’ve let out of the bag, and is now trying their best to put it back in.

Bessent came out today victory lapping about the stock markets going up. In general when a politician victory laps or dances on a grave, that’s a pretty good turning point. As an example, let’s look at how TSLA has done since Tim Walz told an audience he likes to check the stock price for a “pick me up” during the day (because of how badly it’s doing).

Heh.

Unlike Tim Walz, Bessent has a lot of levers to pull that directly affect the stock market. So to some degree, I think we need to take him at his word when he tells us he’s watching it, and takes credit for making it go up.

At the very least, it implies he isn’t eager to see it drop again, and Trump seems more and more content to trust the economy to the “money guys” over Navarro or others.

Trade Deals

Tangible trade deal progress remains elusive. Trump keeps saying he’s in talks with China while China keeps saying “we haven’t talked.”

It’s a situation so outrageous that it can only really be explained with a meme.

On the flip side, it looks like we might have a loose framework for a South Korea deal this week.

The market has been taking a lot on faith this week, but at some point soon we will need to see a signed piece of paper if the market is to believe in the trade deals.

Positioning

The move higher this week was driven largely by short covering, as everyone is afraid to be short when the tangible trade deal announcements actually start rolling in.

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