By Ben Carlson, originally published at A Wealth of Common Sense.
When living through uncertain times like these, many people seek the certainty of answers.
Investors want to know how this AI capex cycle will end.
Potential homebuyers want to know if housing prices or mortgage rates will ever come down again.
Households want to know if we’re stuck with higher inflation for the foreseeable future.
I don’t have the answers because I don’t know what the future holds.
In lieu of answers no one has right now, I find it can be helpful to ask questions.
Here are 14 questions I’m pondering at the moment:
1. Would inflation be even worse if we weren’t in a housing recession? Housing activity remains on the floor:
By some measures, the housing ecosystem accounts for 20% of the economy.
Inflation would be even worse if this sector wasn’t in a full-blown recession.
2. What happens if the housing market bounces back? The reason housing activity remains muted is obvious — high prices and high mortgage rates. Mortgage rates are pushing 7% again.
If prices keep languishing for a few years and mortgage rates fall, housing could act as a shock absorber for the inevitable AI capex slowdown.1
3. Do our tech overlords know what they’re doing? All the tech CEOs said going too small is riskier than going too big.
They’re being true to their word:
This is all going to pay off…right?
4. When will we see the labor market impact from AI? It’s still not happening yet. Check out this chart from Alex Tabarrok:
More firms are actually increasing their hiring because of AI than laying people off.
It feels inevitable that AI is going to disrupt many jobs. It’s surprising it hasn’t happened yet even as the technology has improved.
Maybe it will take a recession. Or maybe some of the claims have been overblown.
5. Did Hollywood predict the future of AI? Ex Machina trained Ava on harvested user data which is basically how the frontier AI labs created LLMs.
In Her, people have relationships with their AI system but (spoiler alert) in the end the AI agents create their own world. AI creating their own little worlds is already happening I guess:
The future is going to be very weird.
6. Are private markets the perfect place for fraud to hide? Mark Walter purchased both the Dodgers and the Lakers using money from his insurance companies that were essentially private credit loans made through intermediate entities.
He was using life insurance premiums from policyholders to buy professional sports teams.
That’s kind of illegal and why he was forced to sell the Lakers a year or so after buying them. He’ll likely have to sell the Dodgers too.
The fact that there is now so much money sloshing around in private markets makes me wonder how much more fraud could be hiding under the surface of these assets with no market price, intermediary fund structures and the potential for self-dealing.
7. Is 2026 the best movie year of the 2020s? The Odyssey was epic — the kind of movie you’re thinking about for days after seeing it in the theater. Obsession is one of the most original movies I’ve seen in a long time. Project Hail Mary lived up to the book. The Invite was hilarious. My kids loved the new Spiderman and Toy Story movies.
I’m all the way back in on new movies after a lull.
8. Are colleges screwed? The Wall Street Journal has a story about the enrollment crisis hitting schools like Syracuse:
They list a host of issues hurting college enrollment right now — prices are too high to justify the ROI, declining international student enrollment, cost overruns, etc.
But here’s the biggest problem facing colleges in the years ahead:
There are fewer 18 year olds every year because of declining fertility rates.
You can’t fight demographics. Sure, name brand schools will probably be fine. But a lot of colleges and universities are in for a world of pain in the years ahead.
9. Is Nvidia the anti-bubble posterchild? Here’s the Exhibit A chart of the week:
Nvidia is the largest company in the world, sporting a $5.3 trillion market cap. Their tentacles are everywhere in the AI buildout.
Yet the valuation for the company keeps dropping because they keep growing so fast.
I know this is just one company but this feels like restraint on the part of investors in the face of a technological boom.
10. How much do interest rates really matter? A lot of macro people assumed it would be impossible for us to get interest rates off the floor coming out of the 2010s. Bond yields have been rising steadily since 2022.
We haven’t had a recession. The economy keeps growing.
The stock market keeps hitting new all-time highs even in the face of higher yields.
Interest rates are obviously important but they don’t matter as much as some people would have you believe when it comes to the direction of economic and stock market growth.
11. Do dividend yields matter anymore? The dividend yield on the S&P 500 is now back to the lowest levels since the dot com bubble:
Yields could be higher if tech companies paid back capital to shareholders instead of investing in AI. Companies also buy back a lot more stock than they did in the past.
Maybe this is a sign of extreme froth in the markets but it’s probably more of a story about the tech takeover of the U.S. stock market. Tech stocks in general don’t have very high dividend yields.
12. How surprising is this year’s earnings growth? Dividends won’t have to matter if we keep getting such strong earnings growth:
Obviously this can’t continue but I don’t think anyone expected valuations to compress this much while the stock market is up double-digits in 2026.
13. How important is the wealth effect to the economy? South Korea is my favorite stock market in the world right now because there are so many stories about retail investors learning about the agony and ecstasy of investing in stocks.
The Wall Street Journal always does a great job of asking everyday investors about their experience in the markets. Here are some quotes from a recent story about South Korean investors dealing with volatility after a pullback:
Yoon Jae-Yi, a 30-year-old English teacher, lost $19,000. She has since cut her living expenses–fewer taxi rides, less travel. Skipping meals, she tells herself, doubles as a diet.
Yoon Kyung-min, a 44-year-old sound engineer, said he still can’t believe the financial disaster of the past two months. After quitting his job, he had invested half of his severance pay into semiconductor stocks and saw $7,200 evaporate in a week.
“If my wife finds out, I will be in serious trouble,” said Yoon, who says he confessed only to a bit of bad luck without giving details.
Yoon thought the market “would rise forever,” he said.
“I got greedy,” Lee said. “I kept thinking, what if it climbed even higher after I cashed out?”
These are all good lessons for new investors. Surely, American investors have a similar outlook on the stock market right now.
But it also got me thinking about how important financial market gains have been to the U.S. economy this decade.
Will we see a meaningful pullback in spending during the next true bear market?
14. How does this cycle end? Can the hyperscalers grow their way out of the free cash flow hole they’ve dug for themselves?
Does the AI capex cycle have to end in a crash like every other time we saw this level of spending?
Is it possible we’re still early in the AI cycle since adoption is still relatively low?
What if we don’t have a recession for the rest of the decade?
Or what if Paul Kedrosky is right and this is a classic bubble?
All I know is that the outcome will look obvious in hindsight but no one knows right now how this will play out.
Further Reading:
Now THIS is a Bull Market
1It has to be inevitable…right?
Ben Carlson writes at A Wealth of Common Sense. Read this article on their site.
