AI Might Kill Us All… But Seriously, Follow the Money

This week’s update at a glance

• The market keeps refusing to break. Bond yields remain above 5% and the underlying macro problems have not disappeared, but the confirmations needed for a serious systemic unwind are still missing.
• There is one new signal worth watching. Credit spreads have widened slightly. It is minor at this stage, but rising yields and widening credit spreads together would be a much more serious combination.
• The AI debate is becoming far too binary. There are genuine risks, but a possibility is not evidence that something will happen. Sensational headlines are not a substitute for examining what the evidence actually shows.
• The money flows are telling us something important. Semiconductors and other parts of the AI trade have strengthened despite a more difficult macro backdrop, as the market rewards businesses demonstrating real demand, earnings growth and economic return.
• Opportunity and risk can exist at the same time. There are still enormous structural opportunities, but this is an environment where investors need to remain organised, vigilant and prepared to change when the evidence changes.

What you’ll learn

• Why my earlier market warning still stands, even though the immediate risk has reduced.
• Why a small change in credit spreads deserves attention.
• How to separate legitimate AI risks from hysteria, headlines and tribal arguments.
• Why the strength in semiconductors is important when the macro backdrop suggests they should be struggling.
• Why following economic return and money flows can be more useful than trying to impose a narrative on the market.

The warning has changed, not disappeared

Two weeks ago I outlined a credible pathway to a much nastier market outcome, while being very clear that several confirmations were still required. Since then markets have been tested repeatedly and, so far, they have refused to break.

That does not mean the bond problem has vanished. The cost of capital remains high, oil remains unpredictable and the financial system is still negotiating a very rapid change in the price of money. What has changed is the evidence. The broader transmission mechanism that could turn those stresses into a serious systemic unwind has not appeared.

There has been a minor widening in credit spreads during the last few days, which is new and deserves watching. Rising yields are uncomfortable enough, but rising yields combined with rapidly widening credit spreads would be a far more disruptive signal. We are not there at this stage.

AI: ignore the hysteria, not the risks

The AI discussion has become increasingly polarised. It can start to feel like two teams trying to defeat each other rather than a serious attempt to understand the technology, the opportunities and the genuine risks.

There are risks with AI, just as there are risks with any powerful new technology. Security, appropriate guardrails and responsible implementation matter. But we also need to distinguish between something that could happen and evidence that it will happen.

We have seen this dynamic before. During Y2K, possibilities became headlines and headlines gradually became accepted as likely outcomes. The better approach is to keep asking what the evidence says, what is not being said, how facts are being framed and where the vested interests sit.

Seriously, follow the money

This is where the market becomes extremely useful. Since July, many of the macro factors that should make life difficult for long-duration technology stocks have deteriorated. Yields have risen significantly, currencies have moved and uncertainty remains unusually high.

Yet many parts of the AI trade have turned higher again. Semiconductors have recorded two strong weeks and technology has started to reassert itself. That is information we should not ignore simply because it conflicts with what logic says should happen.

Importantly, this is not a claim that every AI-related company is attractive. Far from it. The market is being selective and rewarding businesses where demand for compute capacity, earnings growth and economic return are strong enough to overcome a difficult background.

In the same way, describing AI as one enormous valuation bubble tells us very little. Valuation needs to be considered against the growth and economic return of the individual business, and some of the largest beneficiaries of AI over the next decade may not even be the companies people currently think of as “AI stocks”.

Where I’m focused now

• Bonds & credit: The level of yields matters, but the more important issue is whether higher yields start transmitting into rapidly widening credit spreads and forced selling.
• AI & semiconductors: The strength is significant precisely because the macro background has become less favourable. Continue to distinguish companies delivering genuine economic return from those simply benefiting from the theme.
• US equities: The Nasdaq has pushed to fresh highs and the S&P remains close to its peak. For now, equities are still refusing to confirm the more bearish macro argument.
• Gold & silver: Short-term disruption remains possible and I currently see a little more weight to the downside, but that is a probability rather than a prediction. A significant downdraft could ultimately create an excellent longer-term opportunity.

The broader message is simple. Huge structural opportunities remain, but this is not an environment for switching off. Be organised, remain vigilant and keep responding to what the evidence actually tells us rather than what we think ought to happen.

Important information

_{Any advice in this video is general advice only. Neither your personal objectives, financial situation or needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice. Garry Davis (AR No:317590) is an authorised representative of Primary Securities Ltd (AFSL No. 224107).}

_{Note to traders* The publishers of this article/information/promotion wish to disclose that they may hold stocks mentioned in their portfolios and that any decision to purchase those stocks should be made only after the purchaser has made their own enquiries as to the validity of any information in this article/information/promotion.}

_{Past performance should not be taken as an indicator of future returns. Trading and investing in financial markets involves risk of losing money.}

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