The AI Story—What Does AI Think?
While AI stocks have been pushed higher, there are concerns. Beyond just the economy, what does AI think about AI stocks?
Over the past couple of weeks, doubts have been seeping back into the AI story. Some stocks are seen by the market as being vulnerable due to replicability by AI. Some software company stocks have taken large hits to their valuations from wavering expectations.
The carnage is not just software: Real estate REITs have taken a hit as work-from-home is even more likely. While there are many individual sectors that are softening from selling in AI, taking a look at the broader picture is a great place to start.
The AIQ ETF is a great overall ETF to see what is happening with AI. As the chart above shows, there are concerns, and a modest top is in place.
My take on this has been consistent: AI will have winners and losers, and we are now at that point where simply having the AI label in a company’s business model no longer is enough to push the stock higher. Most believe that there is a bubble percolating in the industry. Maybe. Some companies are actually printing results and their respective valuations are not necessarily frothy.
There is also the proverbial K-shaped economy: there is AI expanding, and the more traditional economy remaining stagnant. Interestingly, directions may shift and flip.
Economic Data
Over the past week, economic data hit for both employment and inflation. My focus is usually key economic data, but the AI story has been the story, so coupling them is where I have been putting my positions.
The Employment Situation
Employment printed 130K for the month. There were downward revisions to past data that ultimately showed the US created a mere 180K jobs in all of 2025. Meanwhile, the unemployment rate dropped somewhat. This gives the Federal Reserve barely any incentive to push rates lower as there is some growth in jobs. As for 2025, mostly the cumulative lack of job growth was driven by large chunks of federal government employees quitting.
I still do not see a printable recession given where the economy is at this point. If there is still employment growth through 2026—my expectation—there is not a real compelling story from the employment side of things that would get the Fed to move lower—employment is only one half of the equation.
Inflation
Inflation has been falling, as the latest CPI data shows (above). I typically focus on the annual rate of change with the Core PCE—so does the Fed. They move similarly, but it is not a pure 1:1 relationship. Still, the print could give the Fed some hope for achieving its 2.00% target rate goal.
Money Supply & Inflation—Don’t Expect A Fed Cut
Beyond inflation, when it comes to economic data, I gravitate to the M2 Money Supply growth rate along with the Personal Income growth rate—due this week. If the money supply is growing, this shows that firms are taking on risk and expanding, as well as consumers spending.
The Money supply is seeing an accelerating pickup in pace again (See Above). Inflation follows suit. So, while the tariffs have burdened the economy, there is still resilience. We are now awaiting the Supreme Court’s ruling on the constitutionality of the tariffs. I fully expect the tariffs to be struck down as being an unconstitutional overreach by the executive. Imagine what will happen with the economy if the ball and chain are removed from the ankle!
If the money supply continues to expand as it is doing, and the tariffs are struck down, price pressures will certainly follow suit on an upward growing pace. The Federal Reserve will be in no position to lower interest rates with that kind of scenario.
This, ultimately, will also push the ‘other’ economy into an expansionary mode. AI has been the real support for the economy over the past couple of years. If the consumer is unshackled, then the consumer can do what it does best: Get the cash registers ringing again.
If that were to occur, the Fed would be in no position to lower rates, nor would they need to be because the economy would be expanding.
AI Prediction
For the past month, I held a position where I sold an out-of-the-money vertical call spread for $0.45 while buying an out-of-the-money vertical put spread for $0.28. They expired on Friday. The trade was profitable, but not wildly. First the calls expired worthless, so I collected the entire $0.45 of that side. On the puts, they expired almost dead on at the money, and I closed that side at $0.32. Meanwhile, I had sold a few positions either 0DTE or overnight against the puts to bring in additional funds while keeping risk contained. In total, I earned nearly $1.00 for the month on that trade. There was a bit of size, so that was nice to start the year. I push my size somewhat because I am comfortable doing so. With that big push, this could have been a 1% return for the month.
When I inquired about the trade with AI, the system felt I had “won the trade” and the responses were always that there was a fear of seeing profits evaporate. Meh… I don’t mind risk.
The truth is, no matter what, being correct about the market is the only real path for profits. This requires taking a position in the market, and choosing a side.
My thoughts are that the stock market may come down somewhat, if but briefly. I don’t necessarily believe the selling we’ve seen the past couple of days is enough. AI does not appear to have a point of view on this either, and hedges its responses.
The Query
M2 money supply has increased to 1.09% year-over-year growth while employment numbers have come in showing gains of 130K for the latest month, albeit this is off a year where the federal government shuttered many jobs and all of 2025 printed 180K in total new non-farm payroll gains.
Simultaneously, the CPI data is showing a slow move lower in the year-over-year growth rate in the Core CPI at 2.50%, this is down from 2.65% the month before.
The 1.09% increase the M2 money supply from the previous prints of 1.05% shows that there is growth in the economy, and this will likely push employment gains along with price pressures.
From that, I do not expect the Federal Reserve to have a great deal of room to lower interest rates if the economy continues to print jobs and the rate of growth in inflation continues to move toward the 2.00% target rate, but at a modest decline. If the money supply continues to increase, this shows there will be lagging data that will show employment increasing again, and also the correlation between the growth of money, personal incomes & expenditures add to price pressures.
First, what is your long-term take on this over the next six months with the possibility of increasing employment and inflation?
Next, there are AI stocks. Many stocks have sold off lately in response to AI potential displacement, of which there is no real concrete evidence that AI has really disrupted many jobs at all.
What are your thoughts on the leading AI stocks going into the next 2-5 month period of time considering the concerns of total investments by companies, concerns from stock market participants, and overall valuations on these AI stocks?
Also, balance the two areas in your response with ideas on the broader economy and what could happen in the stock market in the medium-term versus AI stocks and what may occur with these stocks during this same period.
The Response
You’re layering this correctly — liquidity → labor → inflation → Fed constraint → equity leadership rotation. Let’s treat this as a regime forecast rather than a single-variable call.
Part 1: Six-Month Macro Outlook
(M2 1.09% YoY | Core CPI 2.50% drifting lower | 130K jobs | 2025 weak aggregate payroll year)
First: Important nuance on M2
1.09% YoY is positive, but historically:
Below 3–4% → neutral liquidity
5–8% → expansionary
10%+ → inflationary impulse
So right now we’re in:
“Stabilized liquidity,” not accelerating liquidity.
That matters. M2 rising from 1.05% to 1.09% is incremental, not regime-shifting.
Where this likely goes over 6 months
1. Employment
130K is:
Below long-term expansion average
Above recession threshold (~0–50K)
Consistent with soft landing
2025 total payroll growth of 180K for the entire year tells us something important:
The labor market already cooled.
Unless M2 materially re-accelerates (toward 3–4%+), you’re unlikely to see employment reheat sharply. Money supply leads labor, but with:
6–12 month lag
And amplitude dampened when credit standards are tight
So I do not expect a reacceleration in hiring. I expect:
75–150K monthly prints
Gradual upward drift in unemployment
No collapse
2. Inflation
Core CPI drifting from 2.65 → 2.50% is meaningful.
If:
Wage growth moderates
Shelter lags continue rolling over
Goods stay flat
Then inflation likely oscillates 2.2–2.7% over next 6 months.
That is:
Too high for aggressive cuts
Too low for hikesWhich traps the Fed in: “Restrictive but patient.”
3. Fed Constraint
You’re right: The Fed has limited room to cut unless growth rolls over.
But they don’t need to cut for equities to rise.
Historically:
Flat rates + positive earnings = bullish
Rate cuts + falling earnings = not bullish
We are closer to the first setup.
Macro Summary (Next 6 Months)
Most probable path:
Mild USD softness
Inflation drifting toward 2.3–2.6%
Payrolls steady but unspectacular
Fed on hold
Equity volatility suppressed
This is not an overheating scenario. It’s a late-cycle glide path.
Part 2: AI Stocks (2–5 Month Horizon)
Now we zoom in.
Important distinction:
There are two AI trades:
Infrastructure (chips, hyperscalers, hardware)
Application layer (software, services, automation)
Right now the concern is:
“Overinvestment”
Capex saturation
AI replacing jobs
Valuation stretch
But here’s the reality:
AI has not materially displaced jobs.
Productivity improvements show up first in:
Margin expansion
Capex intensity
Revenue per employee
Labor displacement comes later — if at all.
So job fears are mostly narrative-driven at this stage.
What actually drives AI stocks over next 2–5 months?
Three variables:
1. Capex guidance
If hyperscalers:
Maintain or increase capex → infrastructure stocks rebound.
Signal moderation → multiple compression continues.
2. Earnings revisions
If earnings estimates hold → dips get bought. If revisions turn negative → correction deepens.
3. Liquidity + rates
AI stocks are long-duration equities. They care more about:
Real yields
Discount rates Than about CPI drifting 0.15%.
Right now real yields are not spiking. That’s key.
My Tactical View on AI Stocks (2–5 Months)
Base case:
Volatility
Rotational pullbacks
No structural unwind
Why?
Because we are not in:
Tightening liquidity
Spiking real yields
Credit stress
We are in:
Slower but positive liquidity
Stable inflation
Flat rates
That supports multiple stabilization.
However:
If macro drifts softer:
Broader market may outperform AI
Defensive rotation
Equal-weight outperformance
If macro stays stable:
AI leadership resumes after consolidation
Now Balance the Two: Broader Market vs AI
Broader Market (SPY-type exposure)
Pros:
Earnings breadth improving
USD softness supports multinationals
Rate stability
Lower valuation risk than AI leaders
Risk:
Multiple already elevated
Earnings growth must continue
Likely outcome:
Grinding advance, modest volatility, shallow pullbacks.
AI Leaders
Pros:
Structural productivity story intact
Capex cycle not done
Margins supported
Risks:
Valuation compression
Crowded positioning
Earnings disappointment punished harshly
Likely outcome:
More volatile than SPY
Higher upside beta
Higher downside betaWhat Could Change the Script?
Bearish Catalyst
M2 stalls or turns negative again
Core CPI re-accelerates above 3%
Real yields spike
Capex guidance cut sharply
Bullish Catalyst
Core CPI breaks toward 2.2%
Productivity prints strong
AI revenue shows monetization acceleration
Final Synthesis
Over next 6 months:
Macro likely:
Stable but cooling
Inflation drifting lower
Fed paused
No shock
That environment favors:
Broader index stability
Rotational leadership
AI consolidation rather than collapse
AI stocks may underperform in short bursts, but unless liquidity tightens materially, this is not the end of the cycle.
If you’d like, next we can:
Model a downside case (SPY -8%) and see how AI behaves
Or build a probability-weighted scenario tree for next 6 months
Or dig into whether we’re in 1999, 2018, or 2021 analog territory
Your framework thinking is very coherent — you’re asking regime questions, not headline questions.
My Take
While I would not mind being short right now with the disappointment coming from the Fed not lowering interest rates and AI stocks likely to wobble further, the K-Shaped economy also may flip somewhat if economic growth continues to generate momentum. This week, I have sold some vertical puts while the market has remained tightly moving sideways, but I wonder on a strong burst higher in market activity very soon?