The Bear Case Weakens - But Here's the Catch

This week's update at a glance

• The bear case has weakened, but there is no all-clear. The equal-weight S&P 500 outperformed last week, suggesting support is spreading beyond the biggest stocks, even as significant macro risks remain.
• The credit market is sending two different messages. Conditions have improved at the investment-grade end, while lower-quality borrowers are being charged more to compensate lenders for risk.
• Three market paths remain plausible. I favour a choppy advance in US indices, but a catalyst-driven correction remains a meaningful possibility. A broad and sustained surge is the lower-probability case at present.
• Firmus is a lesson in investment discipline, not the end of AI demand. Funding, balance-sheet strength, operating capacity and access to power matter enormously when separating sound infrastructure projects from speculative ones.

What you'll learn

• Why broader US market participation matters when assessing the risk of a major decline.
• How to interpret the conflicting messages from bond yields and credit spreads.
• What might shift the balance between three possible market outcomes over the next 3, 6 and 12 months.
• Why the Firmus IPO setback puts a greater premium on financial strength and genuine project economics in AI infrastructure.

Probabilities, not predictions

This has been an extraordinary week of conflicting signals. Strong semiconductor businesses have encountered weak share prices, while the broader US market has displayed a resilience that does not fit the picture of an imminent collapse. The answer is not to force all that evidence into either a bullish or bearish story.

I can favour a particular market path without assuming that it must happen. My job is to assess the probabilities as the evidence changes, identify the risks that could alter them, and have a clear plan for what I will do if the market moves against my preferred outcome.

Three possible paths ahead

1. Higher probability - an uneven advance. The S&P 500 and Nasdaq could continue to make progress, but in an unspectacular and volatile fashion. Pullbacks of 5-10% remain possible, and large divergences between sectors and individual stocks could make selectivity far more important than index direction.
2. A meaningful risk - a catalyst-driven correction. An unpredictable political, economic or financial event could overpower otherwise strong earnings support and trigger a decline of 10-20% or more. That is a possibility to prepare for, not an outcome I am predicting.
3. Lower probability - a stronger, broader rally. For this to become more convincing, I would want to see bond yields stabilise or ease and earnings strength extend more widely across the market. Those conditions cannot simply be assumed.

The level and, critically, the speed of change in bond yields remain central to this assessment. Investment-grade credit is behaving more constructively, but higher-risk borrowers are still under pressure. Neither a market-wide collapse nor a risk-free advance is confirmed by that combination.

What Firmus tells us about the AI build-out

The abandoned Firmus IPO should not be confused with a collapse in demand for AI computing, networking, cooling or electricity. To my eye, it is a reminder that a compelling industry growth story does not justify any valuation or financing structure. The real questions concern how much capacity is operating, how projects are funded and what economic returns can ultimately be achieved.

I believe the more established and financially sound operators are likely to be better placed as funding becomes more selective. In Australia, secured electricity supply, contracted customers, strong balance sheets and proven construction capability are practical criteria worth examining before taking exposure to a data centre development story.

Where I'm focused now

• US stocks: Earnings growth remains an important support, but strong fundamentals alone are no guarantee of a rising share price. Momentum, valuation expectations and sector rotation all matter.
• Bonds and credit: I want to see less abrupt movement in yields and a clearer picture of whether stress among weaker borrowers is spreading or remaining contained.
• Australia: The banking sector looks less comfortable, while opportunities remain in carefully researched smaller businesses. Broad index exposure and individual stock selection are very different propositions.
• Gold and other commodities: The stronger US dollar is a potential headwind, and I still want more evidence before concluding that the correction in gold stocks is finished.
• Portfolio process: Know why you own each stock, what weighting is appropriate, how you will take profit and what evidence would trigger an exit. Preparation is much more useful than trying to pick an exact market turning point.

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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