Image Source: Pixabay

Below are some of the most interesting things I came across this week.

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Eric Cinnamond writes, “Whether it’s extrapolating unsustainable earnings growth, trusting the Fed will always come to the rescue, or refusing to mark asset prices to market, investors in late-cycle booms have a tendency to believe the unbelievable. In our view, we are in another such period, with participants eagerly riding the wave of easy money and seemingly unlimited gains.”

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As to extrapolating earnings growth, Peter Berezin notes, “…if you take the numbers in this chart seriously, the hyperscalers will hold at least $2.5 trillion in AI assets by the end of this decade. Assuming a depreciation rate of 20%, that would generate $500 billion in annual depreciation expense. This is more than their combined profits for 2025.” (Read more here).

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At some point, capex growth may begin to compete with companies’ “anti-dilution” measures. “Many high-SBC companies… use excess cash flow to buy back their own shares, keeping the number of outstanding shares flat instead of rising… if the company does this to conceal dilution, then the so-called free cash flows were not truly ‘free to shareholders’,” writes Peter Garnry.

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And in regards to the Fed coming to the rescue, Raghuram Rajan writes, “If abundant liquidity raises the policy rates needed to slow the economy and contain inflation, something has to give. Apart from being more cautious about lowering policy rates, the Fed must dial down expectations, perhaps by gently shifting its messaging, that it will unconditionally and indefinitely support markets.”

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But as Vincent Deluard notes (via John Stepek), energy stocks are, “the sector least correlated to the Magnificent 7 in terms of returns. So if the Mag 7 does go down, and drags the rest of the market along, the energy sector is likely to be one of the safer places to be. Indeed, in the 2022 bear market, notes Deluard, US energy stocks rose handsomely at a time when the Mag 7 fell sharply.”

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