Inflation and interest-rate fears, not an AI slowdown, are driving the selloff in AI stocks. The market and Fed are reacting wrongly to AI's rapid growth and value creation. Apart from year-end tax-loss harvesting, there is no reason to sell; this should pass and holders should come out stronger than ever. x.com  x.com 

US stocks face a potentially bigger selloff as rising inflation compounds concerns about AI spending. PCE inflation reached a four-month high of 3.6%, increasing pressure on the Fed to raise rates; Alphabet shares fell after disappointing earnings, slowing ad growth and more than $51 billion of quarterly capital investment. x.com 

US small caps are set for a long run of outperformance, since their 10-year return gap versus large caps has turned negative only in technology booms, each followed by big small-cap runs. After the space-race trough they reached an 18% annualized lead by 1983; after the dotcom trough they led by 8-9% into the mid-2000s. They were cheaper than now only at the dotcom peak. Though up about 20% in 2026, they sit near the widest gap in decades. The call fails only if AI keeps all money in ten names. … Show more

The S&P 500's concentrated, correlated AI exposure makes a large allocation too risky as rates rise. Higher rates could force data-center bondholders to sell AI equities; early AI use appears to be stagnating and unclear ROI may cap demand even if usage grows linearly. Failed lab IPOs or a credit-driven recession could also undermine the market. AI moving on-device or on-premise is another significant risk to data-center capacity demand. x.com  x.com 

Growth stocks should keep outperforming small caps because rising rates now hurt small caps far more. Large-cap and AI-linked growth companies are cash-rich and lightly financed, while about a third of Russell 2000 debt is floating-rate versus roughly 6% for the S&P 500. As hike expectations returned, small caps' lead over the S&P 500 shrank from about 11 points in June to about 2, and IWM tracks long bonds far more than QQQ. The ARKK/IWM ratio has reclaimed its rising 20-month Bollinger basis. … Show more

The market rally is shifting from AI suppliers to AI users, as companies broadly report significant AI-driven cost reductions, a trend since 2025. Retail, healthcare and fintech stocks saw the biggest revenue increases and expense reductions, and small caps are part of this "productivity melt-up." Rising token usage has offset some of the benefit as AI agents cost more to run, and with a stock picker's market on both ends, screening at the ETF level may be less useful. x.com  x.com  x.com  x.com  … Show more

Demand for compute remains strong and the AI investment cycle is still running, so the underlying AI opportunity has not changed. But if wars keep inflation high and rates stay higher for longer, even great businesses will see their multiples compressed, damaging the AI trade without necessarily invalidating it. The S&P 500 forward P/E has fallen from 23.2x to 18.7x, a roughly 5.35% earnings yield versus 5.47% on the 20-year Treasury; how long this backdrop lasts is unknowable. x.com 

AI and chip stocks can hold up despite record long-bond yields because AI fundamentals remain strong, as OpenAI shows. Its annualized revenue is nearing $70 billion, its valuation is approaching $1.4 trillion, and it launched Dots, aiming to turn ChatGPT into an always-on operating layer that executes work across software. If Dots clears reliability, security and cost hurdles, AI could compete with office software and outsourced knowledge work, amplifying revenue in coming years. x.com 

Falling rates and buying in financials, consumer discretionary and Home Depot make US small caps a very good buy here with high probability. The drawdown exceeds 11%, as it did at the start of the Iran war, and daily RSI and MACD are at similar bottoms. x.com 

Far less inflated valuations and significant AI earnings make US equities unlike the dot-com market top. AI/SI spending may still be overexuberant. Rates and yields have returned to historical averages; more oil through the Strait of Hormuz and from OPEC and Russia should lower oil and inflation. The market may not have bottomed yet, but falling yields, steady rates and the midterms passing should let it climb the wall of worry. x.com  x.com  x.com