No. of Recommendations: 14
All METARs know that AI stock fever has powered the stock market higher. The “Magnificent 7” stocks now comprise 40% of the cap-weighted S&P500.
Based on recent estimates for 2025, the spending on AI infrastructure (specifically AI data center capital expenditures) is estimated to be around 1.3% of US GDP.
Google Gemini was unable to answer the question, “What % of U.S. GDP is end-user spending on AI services?” The answer was, “One report notes that despite billions in enterprise investment in Generative AI, 95% of companies have seen little to no Profit & Loss impact, suggesting that broad, end-user spending translating into significant GDP impact (beyond the infrastructure buildout) is still in the early stages.” More articles in the financial press are noting this discrepancy between spending and end-user purchasing of AI services.
Even more concerning, the companies financing AI development and infrastructure are borrowing even though some of them are cash-flow rich. The words “debt,” “complex,” and “growing” have echoes from other bubbles.
https://www.nytimes.com/2025/11/08/business/dealbo...
Debt Has Entered the A.I. Boom
To fund heavy spending on infrastructure for artificial intelligence, companies have leveraged a growing list of complex debt-financing options.
By Ian Frisch, The New York Times, Nov. 8, 2025
…
Blackstone is on the cusp of closing a $3.46 billion commercial-mortgage-backed securities (C.M.B.S.) offering to refinance debt held by QTS, the biggest player in the artificial intelligence infrastructure market. It would be the largest deal of its type this year in a fast-accelerating market….
According to McKinsey, $7 trillion in data center investment will be required by 2030 to keep up with projected demand. Google, Meta, Microsoft and Amazon have together spent $112 billion on capital expenditures in the past three months alone….
Now, the tech giants are turning to financing maneuvers that may add to the risk. To obtain the capital they need, hyperscalers have leveraged a growing list of complex debt-financing options, including corporate debt, securitization markets, private financing and off-balance-sheet vehicles. That shift is fueling speculation that A.I. investments are turning into a game of musical chairs whose financial instruments are reminiscent of the 2008 financial crisis….
Also at play: a financial tool that came into vogue before the financial crisis. Called a special purpose vehicle (S.P.V.), it’s a legal entity that allows a company to take on a lot of debt without having to hold it on its own balance sheet….Overall, according to Morgan Stanley, $800 billion in private credit will be needed over the next two years to fund data centers. And S.P.V.s are becoming a more popular way to structure it….
Are murky financial instruments spreading the risk of the A.I. spending frenzy? According to Menlo Ventures, only 3 percent of consumers pay for A.I.-related services, amounting to about $12 billion per year. If hyperscalers are unable to generate enough profit to offset the costs related to capital expenditures, systemic risk could enter credit markets…. [end quote]
Most METARs are interested in stocks. But financial crises originate from debt. Some corporate debt is public in the bond market but the most dangerous kind is off-balance-sheet debt which is financed by the Shadow Banking System and derivatives. The idea that big companies like Meta and xAI are creating SPVs to borrow money so the debt won’t show up on the parent’s balance sheet is a red flag.
The WSJ’s article from a couple of weeks ago that showed the spaghetti bowl of deals and loans among the AI players was also an important red flag.
Every bubble is driven by a story. The excitement drives the bubble’s growth. Then the growth attracts more speculators. Then the speculators borrow money to buy into the growing bubble.
At some point the story behind the bubble begins to weaken. The price seems very high and the payoff uncertain. Maybe far in the future or maybe never. New buyers fail to show up. At that point the fate of the bubble wavers. Will it pop? When?
Last week, Bullish Percent of the NASDAQ 100 fell from 65% to 40%. The NAZ High-Low Index fell from 400 to -300. NYSE High-Low fell from 125 to -50.
The Fear & Greed Index is in Extreme Fear. The trade is risk-off as stocks and junk bonds fell relative to the price of the 10 year Treasury bond.
The Treasury yield curve rose along its entire length. The Chicago Fed’s National Financial Conditions Index (NFCI), which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems, showed that conditions tightened slightly even though they are still very loose.
The Atlanta Fed's GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2025 was 4.0 percent on November 6. This is a strong reading which is backed up by their increasing "Blue Chip" consensus. Such a strong GDP growth number will reduce the chance that the Federal Reserve will cut the fed funds rate in December.
Economic activity in the manufacturing sector contracted in October for the eighth consecutive month, following a two-month expansion preceded by 26 straight months of contraction, say the nation's supply executives in the latest ISM® Manufacturing PMI® Report. Manufacturing is about 10% of GDP.
Economic activity in the services sector returned to expansion in October, say the nation’s purchasing and supply executives in the latest ISM® Services PMI® Report. The Services PMI® registered at 52.4 percent and is in expansion territory for the eighth time in 2025.
https://www.wsj.com/finance/stocks/corporate-earni...
Four of five S&P 500 companies are beating estimates, but investors aren’t rewarding them for their performance
By Hannah Erin Lang, The Wall Street Journal, Nov. 9, 2025
More than 80% of 446 S&P 500 companies beat third-quarter results estimates, yet the S&P 500 rose only 1.3% since Oct. 14.
The median S&P 500 stock beating estimates outperformed the benchmark by 0.3% the next day, below the historical average of 1%.
Concerns about AI spending, consumer sentiment and high valuations weighed on Wall Street. [end quote]
The Price-to- earnings ratio based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio) is 40 compared with a long-term median of 16. One glance at the chart shows that it looks like the dot-com bubble. Is the AI bubble really different? When spending is so high but the payoff is so low?
The METAR for next week is cloudy. Last week's drop may be noise, just a blip in a rising trend. Or it may be the first rumblings of thunder on the horizon as the extent of the risk grows and becomes more publicized.
Wendy
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