Extreme Uncertainty Ahead of the Fed Keeps Investors Off Balance
Here’s why a potential slowdown in AI development is boosting hyperscalers.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
The market continues to struggle early Tuesday morning as it awaits the Federal Reserve interest rate decision Wednesday afternoon. Investors continue to grapple with a potential slowdown in AI development driven by worries about out-of-control model advancement.
Seldom have we seen such high levels of uncertainty ahead of major events. It is making it difficult for investors to position themselves for what may happen next. My preference is to stand aside and wait for clarity on which themes will develop as events unfold.
The Bond Market Dilemma
The debate in the bond market is unlike anything we have ever seen before. A rate hike is close to a certainty at this point, but there is concern it will not address the main drivers of inflation, which are energy and rapid AI development. The worst-case scenario is that a hike suppresses growth in the areas of the economy that are already under pressure while having little impact on the two big issues driving inflation.
There is also a debate over whether the main reason rates are rising is that the bond market is anticipating a more hawkish Fed. The argument is that the primary force acting on the bond market is not economic conditions but expectations of what the Fed might do. If that is right, then the recent move is more about policy speculation than anything structural. If the market is wrong about policy, it will trigger significant volatility.
It is far from clear how this pressure in the bond market will resolve. Fed Chair Warsh is not signaling his intentions the way his predecessors did, which raises uncertainty dramatically. We are likely to have a strong reaction on Wednesday afternoon and it can easily go in either direction. We will just have to wait and see.
The AI Debate Splits the Group
The other big issue is the AI debate. President Trump is calling worries about AI development a hoax and spoke with Jensen Huang, the CEO of Nvidia (NVDA). What complicates the matter is that Trump’s main concern is that the U.S. maintain its leadership in AI over China, and he views any restriction on growth as a handicap.
From a stock market standpoint, the most interesting part of this debate is that the chip group and other suppliers are being hit hard by growth fears, while big hyperscalers such as Microsoft (MSFT), Meta Platforms (META), and Alphabet (GOOGL) are benefiting. The logic is that a slowdown in infrastructure spending may actually help them by allowing them to focus on profitability rather than rapid expansion.
I’ve written quite a bit about how the AI trade has morphed from a single monolithic trade into a sorting out of winners and losers. This is another example on a larger scale. Slower development may hurt infrastructure suppliers like Nvidia and Micron (MU), but it benefits the hyperscalers that can cut back on spending and protect margins. That is the theme the market embraced Monday, and it explains the rotation out of the chips and into the big-cap names.
Game Plan
My game plan remains extreme patience as we await the Fed on Wednesday. The dilemma the market is presenting is that there isn’t enough downside to create great bargains, and there is too much uncertainty for strong momentum to build.
Some traders like to bet on the outcome of big events like a Fed decision, but that is not my style because it is too risky. I would much rather wait for the reaction to events and then focus on buying the best charts and fundamentals. I prefer to buy stocks when they are moving on their own merits rather than reacting to market conditions.
At the time of publication, Rev Shark had no positions in any securities mentioned.
