AI Bull's Runway Uncertain as Bonds Offer Best Cushion in Years, CNBC Says

CNBC said S&P 500 operating-earnings growth exceeded 30% in the second quarter and is projected to reach that threshold again in the third, yet the index is only 2% above its June peak from before those results were reported. The S&P forward price-to-earnings ratio has compressed from 23 a year ago to 19, which CNBC said can signal reluctance to pay up for record profit margins and next year's decelerating growth, as well as the relevance of rising government-bond yields to companies' aggregate cost of capital.

Consumer spending has held up because unemployment is low and Americans spend what they make, CNBC reported, though real incomes have begun to lag inflation, requiring some dissaving to support consumption. Corporate-debt spreads have begun to rise in recent weeks from historically tight readings as technology bond issuance and Treasury volatility test investor risk appetites.

The Federal Reserve has moved from last year's "insurance" rate cuts to a rate hike, with market expectations of a couple more, CNBC said. While that may be digestible in a strong economy, it raises the prospect of restraint on an expansion that has carried on for more than half a decade. CNBC said each of these items can be spun as mid-cycle adjustments and may well be, since dynamic markets are not governed by a clock and "getting later" is not the same as "almost over."

CNBC said it is tough for an economy to veer quickly into a ditch when the government is running deficits of 6% of GDP while the private sector invests in new productive assets in multi-trillion-dollar bursts once reserved for emergency government stimulus. If valuation compression in AI-buildout bellwethers signals that investors are mindful of an eventual growth plateau, it is also the best argument against criticism that AI equities are in a bubble, according to CNBC. Micron is still trading 15% below its June peak, and Nvidia sits at a steep discount to the market P/E and to defensive, capex-light Apple, suggesting some risk has been drained away.

Market behavior has been dissonant, CNBC said, with historically anomalous statistics piling up. Never before have so many new 52-week lows registered while the S&P 500 was either up on a given day or so close to a record high. Treasury yields making new highs have exacerbated the arrhythmic action, as pressure on cyclical parts of the market propels money into rate-insensitive AI-levered tech giants, producing new lows as the S&P 500 carries higher. In this market moment, CNBC said, very few index rally days are emphatic and no selloffs are fully bereft.

After a June 2 all-time high of 7620, the S&P 500 went sideways in a narrow range for two months and two days until breaking higher to a fresh, if marginal, record on Aug. 4, CNBC reported. As of the report, two months and two days have passed since that breakout, and the index has merely gone sideways in a narrow range but enters the day about half a percent from another new high. Yet since the Aug. 4 pop above 7700 for the first time, the median S&P 500 stock, the Russell 2000, the KBW Bank Index and the equal-weighted consumer-discretionary sector are down between 4% and 11%, according to CNBC.

CNBC compared the unsettled action with late 2018, when tightening financial conditions and internal market weakness in a mid-term election year caused the S&P 500 to drop nearly 20% into year-end, even with earnings growing 20% and no recession in sight. That episode was a brief if treacherous gut check, giving way to a re-expansion of valuations and a march to new highs through 2019 right up until Covid struck, CNBC said.

Dean Curnutt, founder and CEO of Macro Risk Advisors, described the challenge facing risk-aware investors: "The US Treasury market, long referred to as the 'risk-free' asset, is more likely a sponsor of risk than a stabilizing asset in a portfolio…As stock/bond correlation pushes portfolio volatility higher, the correlation among stocks drags it lower. Much lower. The realized correlation among stocks in the SPX over the last 6 months is 4%. This inconceivably low level of correlation is Ozempic for volatility at the index level." CNBC said many people tolerate Ozempic well and are healthier for it, and the current market structure has been remarkably generous toward undiscriminating passive index investors.