Market Insights: 💰 When AI Companies Fund Their Own Demand

🤝 Circular Deals, Soaring Valuations: The Risk Beneath the AI Hype

A flurry of deals between a handful of AI companies has prompted an avalanche of market pundits to declare the market an AI-fuelled bubble. 

Of course, the AI bubble talk has been going on for months, if not years. But recent deals have been compared to 1999 and even 1929.

Since we don’t have a crystal ball (would be nice though), we’re not going to try to predict what happens next. 

However, what we can do is have a look at a few scenarios and some of the ways you can prepare your portfolio for the range of possible outcomes.

🎧 Would you prefer to listen to these insights? You can find the audio version on our Spotify, Apple Podcasts or our YouTube! (Released each Monday by 5pm AEST).

This week's Market Insights is a 7.5 minute read! Full article here

Quote of the week

“Markets can remain irrational

longer than you can remain solvent.”

John Maynard Keynes

What Happened In The Markets This Week?

Here’s a quick summary of what’s been going on:

💵 The ‘debasement trade” is Wall Street's latest obsession (Bloomberg)

• Investors are looking for somewhere to store their wealth amidst a world of monetary debasement. That’s fueling the “debasement trade”: ditching bonds and major currencies, and piling into gold, silver, and bitcoin.
• Gold has grown a whopping $16 trillion since October 2023 to reach an estimated market cap just shy of $30 trillion. Meanwhile, silver’s wild run triggered arbitrage flights across the Atlantic to profit from higher prices in London. 
• Investors are betting that the value of sovereign debt (and their currencies) will erode in purchasing power over time as governments continue adding to their massive debt burdens with growing deficits.
• Political instability in France, dovish candidates in Japan, and fiscal jitters in the UK are only accelerating this trend. Meanwhile, the Fed’s softening stance on bank capital rules could also add fuel to inflation fears.
• If debt keeps ballooning and central banks have their hands tied, hard assets are likely to continue receiving inflows from this trend. 

😠 US officials blast China's actions on rare earths, urge Beijing to back down (Reuters)

• China’s tightening of rare earth exports is rattling markets, as U.S. officials warn it’s a strategic play to control critical supply chains. Rare earths power everything from EVs to defense tech, so this isn't just political noise.
• If Beijing follows through, the U.S. may retaliate with steep tariffs or broader decoupling measures. These are risks that could hit manufacturers, especially in auto, tech, and aerospace.
• As we mentioned two weeks ago, keep an eye on alternative rare earth sources (Australia, Canada) or U.S. subsidies to domestic miners like MP Materials.
• China’s tough talk might end up speeding up the global shift away from relying on its rare earth supply.

To see our take on these market stories below, simply check out the full article!

• 🛍️ Walmart teams up with OpenAI to allow purchases directly in ChatGPT (CNBC)

• 🛢️ Trump says Modi committed to stop Russian oil purchases (Bloomberg)

• 🚗 Tesla demand in focus after Trump policies lead GM, Ford to retreat from EV ambitions (CNBC)

Now let’s dive into the main piece!

🌊 Are AI Leaders Riding a Wave... or a Bubble? 

The stock market is putting all of its chips on a few squares. 

We’re talking about a level of top-heaviness we haven't seen since the peak of the dot-com era.

A handful of AI giants are fueling a massive capex boom and dominating the entire market narrative. This concentration is creating jaw-dropping opportunities... and equally eye-watering risks. 

It’s beginning to look like the entire market hinges on one thing: what AI delivers next.

To be fair, the AI trade is massive. It dwarfs any tech cycle in recent memory.

However, central banks and big financial institutions are whispering the 'B' word (bubble, that is), and for good reason. AI stocks account for 75% of gains, 80% of profits, and 90% of capex spending. 

While the stock market has been massively impacted by this trend, the real-world effect on jobs and productivity has yet to gain as much steam.

You know the crew: NVIDIA, Microsoft, Apple, Alphabet, Amazon, Meta, and Tesla.

They’re not just big; they are the market right now. Their spending is literally the engine of economic growth, with almost 40% of the US real GDP growth last quarter coming just from tech capex.

This chart from JP Morgan tells a similar story…

US Construction Spending - JP Morgan

This level of dominance brings two things:

• 🚀 Upside: When they win, the whole index wins.
• 📉 Downside: If they stumble, well... things gets messy.

So it's clear AI stocks are powering the market like never before,

but that same force could also be its biggest risk.

The question is whether this is innovation… or inflation of expectations.

So our full piece covers:

💥 How concentrated the AI trade has become,

and what that means for markets if sentiment turns.

🏗️ The “circular financing” loop between chipmakers

and AI startups, and why it matters.

📊 What central banks and analysts are warning

about valuations that assume perfection.

🧭 How investors like you can stay exposed to AI’s upside

without being blindsided by a correction.

💬 Join the discussion by leaving a comment!

 Would you keep riding the AI wave for another year,

or start hedging in case the tide turns?

Key Events During the Next Week

Monday

• 🇨🇳 GDP Growth (Quarterly/Annualized)
  • 📈 Forecast: 5.40%, Previous: 5.20%
  • ➡️ Why it matters: The forecast increase in GDP growth suggests China’s recovery remains on track.

Tuesday

• 🇨🇦 Inflation Rate
  • 📈 Forecast: 2.2%, Previous: 1.9%
  • ➡️ Why it matters: Inflation is forecast to rise, but remain close to the Bank of Canada’s target - so it’s unlikely to affect policy.

Wednesday

• 🇬🇧 Inflation Rate
  • 📈 Forecast: 4.00%, Previous: 3.80%
  • ➡️ Why it matters: UK inflation remains higher than other G7 nations, keeping pressure on the Bank of England to hold rates at relatively high levels.

Friday

• 🇺🇸 Inflation Rate (Year-over-Year)
  • 📈 Forecast: 3.0%, Previous: 2.9%
  • ➡️ Why it matters: The Fed’s dovish stance should remain intact unless inflation increases more than the expected 0.1%.

It’s week 2 of Q3 earnings season, with two of the Mag7, a few chip makers, and large caps in most sectors due to report:

• Amazon
• Tesla
• Netflix
• Procter & Gamble
• GE Aerospace
• Coca-Cola
• IBM
• T-Mobile
• Philip Morris
• RTX Corp
• Intel
• Texas Instruments

Until next week, invest well.

Simply Wall St