Nuke startup Oklo reports progress on major projects, overshadowing bigger-than-expected Q3 loss

If the AI trade were to have already peaked, we’d probably retroactively refer to this stretch as a mix of an earnings bubble (like the period of over-earning based on some unsustainable credit trends that preceded the financial crisis) and a valuation bubble (like the dot-com boom, where rapidly expanding price-to-earnings ratios were the key driver of explosive gains).

But if we’re doing anything close to running back the late ’90s, well, this bubble is going to get some more air to inflate it.

The so-called “Fed model” used to value the S&P 500 by subtracting its expected earnings yield from bond yield currently sits at about 0.35% in nominal terms and 2.6% in real terms, versus lows of -2.75% and -0.4%, respectively, during the dot-com episode. Lower readings indicate a higher willingness to buy risky securities relative to risk-free US government obligations.

In a recent report, Bank of America equity derivatives strategists led by Benjamin Bowler wrote:

“The AI revolution represents another profound technological leap, one that we think is likely to also result in an asset bubble. Strikingly, the late 90s analogy suggests that 2025 is tracking 1996, an interesting parallel even if coincidental. Moreover, a unique tailwind this time is the amplification coming from government support and the perceived existential threat AI dominance presents to geopolitical power. In our view, the likelihood of avoiding a significant asset bubble in AI seems low given this backdrop.”

Using its in-house methodology for assessing whether assets are in a bubble, they judge that “​​the core of the AI trade in the S&P, Nasdaq and the Magnificent 7 stocks remains far from these levels,” which suggests “the AI trade may still have room to run into 2026.”

Indeed, none of the publicly traded hyperscalers has a forward price-to-earnings ratio anywhere near Cisco’s peak of over 130 during the dot-com bubble.

Amazon, Meta, Google, and Microsoft don’t really trade at ridiculously high multiples on this metric, relative to their own history or the S&P 500. But for all except Amazon, these stocks have set fresh valuation peaks based on price to estimated free cash flow in 2025, data from Bloomberg shows.

(Oracle seems to be its own kettle of fish, so we’ll leave that alone to its Sam Altman-filled sea of doubts and debt here).

The difference here is capex, which weighs on earnings over time via depreciation expenses but impacts how much money is going in and out of the door immediately.

Ryan Cummings, chief of staff at the Stanford Institute for Economic Policymaking, notes that AI isn’t anywhere close to the lion’s share of sales or earnings for these firms, and estimates that AI-centric sales are being far outstripped by AI capex.

That’s pretty reasonable, considering that we’re still arguably in the early stages of pushing this technological frontier and that a good chunk of this spending is dedicated to making AI models better — putting them in a position where they will be bigger drivers of financial performance going forward.

One way to square this circle between elevated, not crazy forward valuations based on one metric and sky-high ones based on another is to conclude that the lack of runaway forward price-to-earnings ratios suggests that the market does continue to have some skepticism about the long-term earnings power associated with all these capital outlays.

Less doubt would equal higher valuations and higher stock prices. No doubt and unbridled optimism about how much these first movers in AI will reap rewards for years if not decades to come… that’s how we really get a bubble.

“Big Tech has compelling valuation on a growth-adjusted P/E basis, but free cash flow yields are hardly attractive,” wrote Michael Purves, CEO of Tallbacken Capital Advisors. “Ultimately, this valuation methodology debate boils down to the question of whether this massive capex spend will generate compelling returns on invested capital (ROIC). While we won’t know the answer to this ROIC question for some time, we expect the mere existence of this critical question to hover over the markets for some time.”

Retail traders had a great year, because they bought the dip, stayed long AI stocks, rode momentum in precious metals, and took risky bets on speculative stocks that paid off.

Goldman Sachs’ baskets of retail favorites, high-beta momentum longs, and nonprofitable tech companies are all handily outpacing the S&P 500’s return year to date.

Retail trading activity is increasingly affecting how stocks trade on earnings releases and crowding institutional investors into their favorite stocks. It’s a force worth paying attention to.

The options market stands out as the place to go to monitor retail sentiment and desire to take risk. Call buying is a critical catalyst behind meme stock rallies and days when quantum computing companies go parabolic on absolutely zero news. The stock market can increasingly be viewed as a temperature check of companies whose long-term operational viability probably won’t be known for many years and whose near-term performance is governed by options with five days or fewer to expiration.

Obviously, not all calls are bought to open; many are sold as part of income-generating strategies. But you’d be hard-pressed to look at trends in call volumes and not see obvious parallels to the period that ran from the end of the pandemic-induced bear market to peak SPAC/GameStop in 2021. This was a stretch where speculative appetite was palpable, bankrolled by stimmies and inspired by Covid limiting most of everything else we’d want to do. We’re in the midst of a multiyear stretch of similar intensity.

So following this chart of median daily call volumes traded across US exchanges over the past three months will likely help answer a ton of questions, while raising others along the way:

Is the boom in speculative stocks still going strong?

If call activity is going down and key US stock indexes still go up, are retail traders really that important after all?

Are other opportunities for speculation (such as prediction markets) cannibalizing options activity?

Caveat: the increased availability of S&P index options, spreading to platforms like Robinhood, has definitely contributed to this boom, particularly for options with zero days to expiry.

(Robinhood Markets Inc. is the parent company of Sherwood Media, an independently operated media company subject to certain legal and regulatory restrictions.)

We don’t seem to live in a world where AI capex for capex’s sake is rewarded by investors anymore. Investors likely need to see increasing downstream adoption — that is, AI being used more and more in the field.

One problem with this is that surveys on Corporate America’s utilization of AI are all over the map; I’ve seen some in the low double digits and others in the neighborhood of 60% or more.

AI capex is both offensive — a bid to create new revenue streams and enable products that don’t exist — but also defensive, made by tech behemoths trying to ensure their existing dominant positions don’t get swept away by the tide of this new technology.

In many cases, Fortune 500 companies that want to implement — or, at least, dip their toe in the AI waters — don’t have a preestablished strategy or plan of action to do so. They need outside help for that.

Some good proxies for Corporate America’s willingness to spend on AI, therefore, can be found through consulting giant Accenture’s new bookings as well as IBM’s generative-AI book of business.

Accenture is in the business of helping companies “reinvent” themselves, a process that the consulting giant itself has had to undergo in light of how the industry has been rattled by the emergence of AI. And to do that, it’s turned to… AI, overhauling its work force, striking partnerships with OpenAI, Anthropic, Snowflake, and Palantir, and also buying a majority stake in DLB Associates, an AI data center engineering and consulting firm.

“We are expanding in these partnerships because of what we see in client demand,” CEO Julie Sweet said during Accenture’s December 18 earnings call. “We really try to be number one with all of the partners so that we can help our clients integrate and use these new technologies with their existing ecosystem, which is absolutely critical to them.”

Annoyingly, Accenture has decided that it won’t be breaking out AI-specific financial performance going forward, but that’s also a signal of how much management thinks this is integral to its overall growth.

And for IBM, AI-related consulting feeds through to other parts of its business, as its AI book of business also includes associated software revenues.

“Definitely the AI piece is a strong contributor to the software growth and I believe it’s a big piece of why consulting is beginning to return to growth, because we called the play to move toward AI almost two years ago,” IBM CEO Arvind Krishna said on the company’s most recent earnings call.

Gold is the best-trending asset in financial markets. The shiny metal hasn’t traded below its 200-day moving average since November 2023, and currently sits about 25% above that level. Not the S&P 500, nor the Nasdaq 100, nor even Nvidia can boast nearly as long of a positive streak.

And bitcoin, which has been called “digital gold,” certainly can’t either: in Q4, the crypto asset is behaving the opposite of gold, trading 20% below its 200-day moving average for the first time since Q4 2022.

Bitcoin has traditionally been a phenomenal barometer for assessing speculative vibes, which makes this year’s gap between its performance and that of fringier, unprofitable stocks amid a bevy of call buying even more befuddling. 2025 is poised to be the first year in over a decade that bitcoin has fallen relative to gold as the S&P 500 has increased. 

The ratio of bitcoin to gold hit its 2025 high the session after President Trump’s inauguration, and all-time peak in between the election and his returning to office. The idea that the “crypto president” catalyzed a “sell the news” dynamic for this pair at the start of his second term in the same way that “build a wall and Mexico’s going to pay for it” put in a pre-Covid top for USDMXN at the start of his first term looks fairly appealing, especially with a dearth of fundamental news available to explain crypto’s price gyrations.

1 BTC still = 1 BTC. But at its peak relative to the shiny metal, one bitcoin bought you more than 40 troy ounces. Bitcoin doesn’t weigh anything, strictly speaking, but it’s worth less than half its weight in gold now compared to then.

This ratio and its constituent parts are well worth monitoring into 2026, as they might shed light on whether bitcoin’s relationship with risk assets has changed in some enduring way, or if its major underperformance this year is a function of how strong returns were as it became apparent Trump would return to office in 2024.

Gold, meanwhile, remains worth keeping a close eye on as the strength and longevity of its march higher — reinforced by retail traders riding momentum, systematic strategies owning things that go up, and central bank buying — suggest that any break in this trend would require a meaningful shift in the investing or macroeconomic backdrop, and the fallout would extend far beyond the shiny metal.

For instance, based on data going back to 1975, the only time gold’s exceeded its current streak of trading above its 200-day moving average ended in 2011. That roughly coincided with the post-2009 intermediate bottoms for home building and banking stocks, which had been in a prolonged malaise even years after the post-financial crisis recession had ended.

At a very basic level, business development companies and regional banks are both in the lending business. And their borrowers aren’t generally the most creditworthy companies.

But two ETFs that track regional banks and these providers of private credit — SPDR S&P Regional Banking ETF and VanEck BDC Income ETF, respectively — have charted different courses in 2025: the former flying and the latter sliding.

Since BIZD has a higher dividend yield than KRE, the stock price chart overstates the performance gap year to date — but it’s still immense, at nearly 20 percentage points through December 24.

There have been fair reasons for the divergence in 2025. One was the reversal of the conditions that sparked a regional banking mini-crisis in 2023: high interest rates, particularly for the longer-term bonds these institutions held on their balance sheets. The Fed’s easing cycle provides some relief for regionals from lower interest rates paid on deposits. 

And private credit has suffered its own face-plants: notably, the blowups of US subprime lender Tricolor and auto parts firm First Brands.

“I think more interesting for the private capital space is not the next ‘cockroach’ in private credit, but a changed backdrop,” tweeted Jon Turek, founder of global macro research firm JST Advisors. “Since the GFC, these firms have had the tailwind of either low cost of capital or high NGDP. That ‘either, or’ seems like a less clear bet going forward.”

If this is still the golden age of private credit, then why does the stock performance of those who provide it look so tarnished? Conversely, if US regional banks are hitting 52-week highs, how worried can we be about the domestic economy?

The performance gap in 2025 leaves us with those questions, and something to monitor going forward.

If 2026 is a world in which the US economy is healthy, inflation is still high enough to keep monetary policy more neutral than accommodative, and employment isn’t weak enough to demand lower rates, then these are two pockets of the market you’d expect to be doing pretty well. 

While idiosyncratic divergences can happen (and we’ve seen two in the past three years!), they certainly aren’t common. Any prolonged period of poor performance from either of these ETFs would likely speak to mounting worries about the health of the US economy, given their exposure to less-than-pristine borrowers.