The financial markets have become jittery lately due to concerns about high valuation multiples, particularly among AI stocks, and a potential government shutdown. President Donald Trump reportedly will meet with the top four congressional leaders at the White House on Monday as the threat of a government shutdown on October 1 looms.
Meanwhile, investors are once again wondering whether the massive spending on AI infrastructure by the "hyperscalers" will ever pay off. It's a reasonable concern, as AI is an application that generates increased demand for data processing and storage to infinity and beyond. If so, that will require lots of capital spending to infinity and beyond. Alternatively, the novelty of AI might wear off once everyone has had a chance to discover its applications or to abandon its usefulness. That might leave hyperscalers with excessive data center capacity.
Another possibility is that the next generation of GPU chips will be even faster and operate at room temperature, reducing the water and electricity demand of data centers. That means today's state-of-the-art chips could become obsolete before they've generated any profits.
The hyperscalers are included in the Magnificent-7, which collectively sport a weekly Buffett Ratio of a record 8.2 (chart). They've driven the ratio to a record 3.2 for the S&P 500. Excluding them, the ratio for the S&P 493 is 2.4. As a result, we expect to see the bull market broaden, boosting the relative performance of the Impresssive 493.
Meanwhile, the 10-year US Treasury bond yield rebounded off 4.00%, just before the Fed cut the federal funds rate on September 17, to 4.20% currently, on better-than-expected economic news this past week (chart). We are sticking with our 4.25%-4.75% range for this yield and extending it through Q1-2026.
