By John Goltermann, CFA, CGMA
“Speculation is only a word covering the making of money out of the manipulation of prices, instead of supplying goods and services.”
– Henry Ford
The 4th quarter of 2025 brought an increase in price volatility as traders began to question the economics of AI and the high profit growth implied by tech stock prices. As inflation remained high, the prospects for significant interest rate cuts diminished in early November, which took some wind out of speculators’ sails and brought declines in many stock prices.
But once the data began to flow again after the October government shutdown, it became clear that there was a significant deterioration in the labor market and traders were cheered by that. Why? Because to them, that means more intertest rate cuts ahead. This data is what fueled stock prices at the end of November. Below is a graph showing the change in market expectations of a December rate cut going from a 22% to 87% probability in one week (the red line).
Source: Polymarket
All of this whipsawing of stock prices based on guesses over Fed policy can be exhausting. And it is not healthy because it is not the “predictability and stability” that the Fed strives for. It’s a result of government disruption, a lame-duck Fed chair, a dual (and conflicting) Fed mandate, an overly “data-dependent” Fed (that may be looking at the wrong data) and a slowing economy with high inflation.
The confusion over future policy makes all-the-more relevant the question of what the current set-up is (expectations) in stock prices today. Everyone wants to know. Is it 1) a speculative frenzy with too much capital chasing too few ideas; or 2) a rational runup in prices because the companies involved in artificial intelligence are going to be among the few thriving companies in a new economy driven by machines and robots? The answer to that question is critical to determining sensible positioning today. It’s hard to analyze a very complex question in two pages, but in summary here is our view:
Every era believes its boom is different. Each cycle follows the same emotional pattern – an idea that begins in truth; and is fueled by liquidity, leverage (debt) and excitement (fear of missing out). The boom ends when expectations outrun reality. In every past boom, the underlying technologies are transformative, but so were the innovations that fueled them. If history repeats itself, artificial intelligence will prove to be another so-called capex (capital expenditure) boom that is destined to fade. There have been many such capex booms throughout history: railroads, electrification, energy, internet, etc. Each one promised to radically change the world, and did. But what they all have in common is that every one of them became over-invested, the returns on those investments declined a lot; and they were written down significantly.
Lessons can be drawn from these experiences (some of this is from our friends at BCA (Bank Credit Analyst) Research):
- Technology adoption happens in phases: the first is when die-hard users embrace the technology, the second is mass adoption and the third is when laggards jump on board. Stocks rise during the first phase and peak out during the second phase. There is evidence that AI adoption may have already peaked and even declined by some measures in recent months.;
- Revenue forecasts underestimate the degree to which prices will fall. For example, internet traffic increased 67% annually (huge) between 1998 and 2015, but the price of transmitting on bit of information fell even more quickly;
- Debt became an even more important source of financing. We have seen large technology stocks such as Meta and Oracle borrowing huge sums and, not to get too technical, the price of their ‘credit default swaps’ (effectively insurance policies on possible future defaults on such debt) have exploded higher;
- Asset prices peak before investment declines. We’re probably not there yet as investment is still robust, but there are signals that we’re getting closer; and
- The bust weighs on the economy when it happens. The fact that job openings have fallen to five-year lows and layoffs have picked up despite the tailwind from AI capex and rising stock prices suggests that the economy will struggle if the AI trade sours. In 2001, a real estate bubble replaced the tech bubble, but it’s not clear if there will be a follow-on bubble this time.
As shown in the chart below, freight shipments are back to pandemic lows meaning the fundamental economy is weak. This cannot be dismissed as a simple “AI displacement” effect. Traders look at data like this and conclude that further interest rate cuts are ahead. And they are probably right.
Source: Cass Information Systems/Haver Analytics
So, at the moment (mid-December 2025), stock prices have been kept buoyant by the prospect of more stimulus from lower rates, quantitative easing and government spending . But offsetting that is the reality that technology stock prices, by far the biggest weight in major stock indexes, are already priced for beyond perfection. Capital spending booms and manias do not last forever and can negatively impact the economy when they roll over.
This push/pull dynamic comes at a time when big tech has announced plans to invest $3 trillion in AI over the next five years, many using large amounts of debt financing. I will expand on this topic on the webinar scheduled for January 13, which will post to our web site thereafter. When we look at relevant factors and draw lessons from history, we believe the right thing to do is to invest in companies that either 1) benefit from AI adoption, or 2) continue to dominate independent of AI. And to stay out of those companies whose valuations are in the stratosphere and investing trillions in short-lived assets and using debt to do it. That will not likely work out well for them in the end.
Investing is just as much about what you don’t own vs. what you do own. Our ongoing goal is to protect your capital by keeping you out of investments with limited upside and large downside risk. Instead we strive to have you invested in opportunities that we believe offer good returns with lower risk to grow your capital over time.