Weekly Market Overview

The week began with a cover story in*The Economist*:“Will bonds blow up?” The renowned weekly lived up to its reputation as a contrarian indicator: bond markets—at least those for government bonds—promptly stabilized. This happened despite a higher-than-expected U.S. inflation rate, with core inflation at 0.3% on a monthly basis. The explanation? A majorgrowth scare: fears of a slowdown in growth outweighed concerns about inflation. In Europe, too, interest rates fell and the crucial French-German yield spread stabilized. However, the situation remains tense.

While government bonds rebounded, the riskiest corporate bonds moved in the opposite direction. More specifically, bonds issued to finance the expansion of AI infrastructure caught investors’ attention.  CoreWeave’s bonds, issued in July with a 9.75% coupon, are now trading at nearly a 15% yield, while Oracle’s bonds hit a record low. Their business model is faltering: they are selling more and more computing capacity in advance, but while revenue won’t come in until later, investment and financing costs are already mounting.

The stock markets followed the bonds. The AI infrastructure trade underwent a sharp correction, reminiscent of the July sell-off. Even stocks of companies with the most robust business models—such as semiconductor equipment manufacturers or memory chip makers (see Korea)—were hit hard. This occurred despite healthy balance sheets, record earnings, and historically high cash flow. There are two reasons for this. First, investors had once again become very bullish, and sentiment and positioning had climbed back to record highs. Second, there are all sorts of unanswered questions. Will the massive investments yield returns quickly enough? Isn’t the financing of these investments becoming too circular? What about the disruption of existing business models by increasingly advanced AI models? Or worse, what about the systemic risks posed by runaway AI agents? The price movements of the past few days serve as a reminder to investors that the dominance of the AI theme presents both opportunities and risks.

The drop in interest rates and the correction in AI infrastructure provided some relief to other parts of the market. Software stocks rebounded. And defensive sectors in particular—such as utilities and healthcare, as well as the much-maligned consumer sector—rebounded. However, it remains to be seen whether this is more than just a “dead cat bounce,” given the structural headwinds in these sectors. Incidentally, since these sectors have come to account for an ever-smaller portion of the stock market, they offer little support at the index level. On top of that, earnings season is not helping: Goldman Sachs, Citi, UnitedHealth, Johnson & Johnson, and ASML all reported strong results and were all sold off.

The dollar continued to climb to its highest level in 17 months, this time as a “risk-off trade.” Energy prices remain volatile, with prices for refined products in particular remaining very high. Gold and Bitcoin corrected.

Over the past week, a choice between two scenarios has begun to emerge. In the first, the AI sector faces structural problems for the reason the bears have long cited: excessive investment relative to insufficient cash flow. If those fears prove justified, the market could face a much larger correction. The second scenario—which currently seems more likely—is that the AI bull case remains intact, but the market does its job: it calls the most vulnerable business models into question and shakes out the most reckless speculators. Whichever scenario prevails, one thing is certain: the narrative follows the price. In hindsight, it will all seem logical.