Why It Is Bullish When Bubble Fears Collide With Dystopia

Surprise! Global stocks closed at all-time highs Wednesday. Not that you would know it, given the reams of articles chewing over a certain Substack post’s sci-fi dystopian views of what AI could do to markets, the economy and white-collar workers in less than three years. They keep saying markets are panicking about all this, cherry-picking big declines among some companies to prove their point. But the broad market—the best, most efficient aggregator of human wisdom and nonsense—tells you things look overall fine.

Now, it is all-too easy to have a cynical view of stocks’ resilience. Like: Well of course stocks are fine, the companies will profit massively off replacing humans with robots, get your naïve head out of the clouds. But actually, no. The broad universe of publicly traded companies would not be fine if we were all simply zoned out playing videogames while living off the dole or plugged into the matrix or whatever. “Workers” are “consumers,” too, and a massive chunk of companies make their earnings by selling goods and services to “consumers.” Rapid displacement and impoverishment of the proverbial middle class would not be just another Tuesday for the stock market.^[i] If this scenario were actually in the offing, stocks would tell us long before people would be talking about it, just as they priced in the implosion of the dot-com bubble long before people started seeing it in 2000. And just as they started pricing in the deleterious effects of the mark-to-market accounting rule’s application to illiquid, hard-to-value assets in October 2007, long before the word “writedown” entered the popular vernacular just ahead of “bailout.” General rule: Whatever the zeitgeist sees is already old news to stocks.

Posts like the one going viral now don’t tell you much about the market, its outlook or the economy’s future. They are useful only as a mirror to the human race’s psyche and emotional health—in other words, investor sentiment.

The aphorisms about this are well-trod. Be greedy when others are fearful and fearful when others are greedy. Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. Wall Street uses all sorts of surveys and quantitative tools to try to measure this. But you don’t need that. It is pretty easy to gauge intuitively. Think about the perpetual pessimist in your life, the one who can’t shake that cartoon one-man raincloud. Think about why you might sometimes be too tired to have a long conversation with them: They are always looking for reasons to be unhappy/scared/anxious/mad at the world.

Now think about the perpetual optimist in your life, the one for whom everything is always hunky dory and there is no trial that can’t be put right with bluebirds, lemonade and a cliché. Think about why you might sometimes be too tired to have a long conversation with them, too: They are always looking for reasons to be happy and excited and refuse to be honest when things genuinely aren’t ok and I can’t handle the chirping.

Since ChatGPT entered the zeitgeist three years ago, headlines have warned stocks’ bull market is an inflating AI bubble. They still say so, even now, as AI fears hassle software and a handful of services stocks. With the so-called “AI hyperscalers” who are building and profiting off the AI infrastructure commanding big price-to-earnings ratios, it is all bubble, all the time, allegedly.

Yet bubbles inflate on optimism and get overinflated on euphoria. In an actual bubble, you will have that annoying, irrationally optimistic cohort explaining away every last hint of possible trouble, reaching ever-farther into Lala Land to do so. They will be the only voices in the room, or close to it. And there are some of those folks today, just like the crypto true believers explaining away every day of bitcoin’s continued slump. But they aren’t the only voice in the room or even close to it. The loudest voices, the most populous chorus, is the cohort looking for reasons to be sad. The AI doomsday Substack post gave these folks permission to air it out once again.

We write all this realizing it makes us sound a little like the irrationally optimistic crowd. We aren’t. We actually think both sides are flawed. No, your friendly MarketMinder editors who live in Silicon Valley don’t think they will be joining some local Occupy movement and picketing OpenAI’s headquarters in 2028 (unless Sam Altman emerges as the leading crusader in the mid-Peninsula NIMBY movement—then I would have a bone to pick!). At the same time, we don’t think the euphoric visions are right, either. All industries are cyclical, and all invite the risk of malinvestment. Any and all of these players could go too far, spending too much now on long-term projects that won’t pay off. That is one thing we are watching very closely … just as markets are, judging from the fact five of the Magnificent Seven giant Tech and Tech-like stocks underperformed last year.

But also, while we aren’t risk-blind, we find the biggest risks to stocks aren’t the ones everyone talks about. Markets pre-price all that. The real risks are the ones allowed to fester while everyone is looking elsewhere. Private equity and private credit fit that bill a year ago, though their troubles have become more visible lately, helping sap their surprise power for now. But as regulatory scrutiny of the industry grows, there is potential for some niche-sounding changes to have snowball consequences, so that is a good risk to monitor. Monetary policy errors are another, as investors have seemingly taken their eye off the Fed, satisfied with President Donald Trump’s nomination of a conventional Fed insider, Kevin Warsh, as Fed head appointee. But when we review his record in Fed transcripts, we see a fellow who missed some crucial things in 2008, miscast quantitative easing as inflationary and once described a steeper yield curve as “tightening.” Thankfully the Fed votes by committee, but this might not be the steady pair of hands everyone thinks it is, which creates at least a small risk of unexpected error.

Maybe everyone is stewing over the AI doomsday report for the fun thought exercise. We get it. This has been kind of a slow, repetitive news stretch, and something new is always fun. But this isn’t about whether the report is right or wrong and what kind of policies the government should put in place now to make sure none of it comes true. We have seen some wacky ideas on that front, and it all makes us thankful for gridlock.

No, this is about remembering how markets work. They are sentiment-driven fools in the short term, sometimes, but in the longer run they weigh fundamentals—how corporate earnings and the factors that drive them are likely to unfold relative to expectations over the next 3 – 30 months. And as they do so, they tend to look where everyone isn’t.

So if you find yourself gravitating toward the fearful and dystopic, just go full fiction instead. Watch Blade Runner or Beyond Thunderdome. Catch a Twilight Zone marathon. When it comes to investing, stick with probabilities and facts.