Is AI Just a Bubble?

Stocks took a slight upward swing this morning, riding on hopes that the Fed pauses its rate-hiking campaign this Wednesday.

The Dow gained 107 points (+0.3%) while the S&P jumped 0.4%. The tech-heavy Nasdaq Composite unsurprisingly led the market, rising 0.8% as rate hike odds fell. This nudged the S&P 500 over the 4,300 mark, a spot it hasn’t reached since August. The 10-year Treasury yield advanced again, however, expanding the growing disconnect between stocks and Treasurys.

According to the CME Group’s FedWatch tool, the chances of the central bank skipping a hike are sitting at a comfortable 74%. That’s up somewhat from last week but still low enough to provide a modest tailwind for tech bulls.

Despite the market’s hopes for a pause, Dylan Kremer, co-chief investment officer at Certuity, believes the Fed isn’t quite finished raising rates.

“We’re not completely ruling out more hikes,” Kremer said, “but we think it’s a toss-up whether another hike will happen in this cycle.” He added that the upcoming CPI report “could give the markets a temporary boost, helping them to keep climbing.”

Tuesday’s inflation data might strengthen the argument that inflation is cooling off, which should help the S&P punch above 4,300. Economists are predicting the consumer price index will reveal a drop to a 4% annual rate in May, down from 4.9% the previous month.

But investors expect that Fed officials will underline their commitment to holding inflation in check. Many analysts are still predicting a final hike from the Fed following its July meeting even if there isn’t a June rate increase. Since launching its policy of tightening last year, the central bank has already increased rates 10 times.

If the Fed pauses hikes this week (at least temporarily), though, will stocks be able to rally further despite the market’s recent gains? According to Wedbush analyst Dan Ives, the broader indexes could be lifted on continued AI optimism.

“With massive cost cutting across the tech sector the last 9 months, stable enterprise spending, and a resilient consumer we believe the stage is set for a ‘1995 moment’ as AI is the most transformational technology we have seen since the Internet started to take shape,” Ives wrote.

“While many of the tech skeptics will point to today as a ‘1999 moment’ ala on the verge of the bubble/collapse given the significant move in tech valuations, we strongly disagree. The massive $800 billion AI opportunity (our estimate) is now on the doorstep for the tech sector for the next decade.”

And though that sounds wonderful, it’s also exactly the same kind of thing that Wall Street analysts were saying in 1999. Direct quotes from back then are hard to come by these days, as banks rushed to erase their embarrassing takes after the Dot Com bubble popped. But, overall, the message was very similar.

Most important, however, is the fact that anyone piling on the AI hype at this point will be doing so amid overbought market conditions. Traders who want to participate in the AI bubble should wait for a short-term selloff at the very least, which could arrive right around the next time the Fed raises rates.


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