Has the AI rally gone too far?

Market Outlook & AI Theme

• Josh Shiffrin identifies the primary downside risk as the unresolved geopolitical situation in Iran; resolution would keep the market on track.
• Dominick Wilson argues the AI investment theme is "more normal than perceived," supported by a powerful macro story and an ongoing CapEx boom.
• Wilson notes that macro balances reminiscent of the 1990s have not yet emerged, with AI capex and profits as a share of GDP reaching record highs.
• Both analysts agree the broad market trend remains positive despite the potential for near-term pullbacks.
• Earnings Context
  • Q1 reporting was "terrific," driven by strong fundamentals in the US and Korea.
  • Wilson initially estimated corporate earnings growth at "high, high teens" year-over-year.
  • Wilson later corrected this figure to the "high 20s" when including private equity mark-to-market valuations.
  • Market performance remains resilient despite absorbing tariffs and higher oil prices.

Signs of Speculative Euphoria

• Wilson identifies emerging speculative enthusiasm specifically within the tech and semiconductor sectors.
• Assets in levered ETFs focused on US semiconductors have surpassed $100 billion in a very short period.
• There is extraordinary volume in call options for specific single stocks, indicating heightened risk-taking by both professional and retail traders.
• Dominic Wilson cautions that while fundamentals support the rally, the intensity of risk-taking has increased.

Federal Reserve Policy

• The consensus view is that the Fed will remain on hold ("watch and wait") for the remainder of the year.
• Kevin Warsh's official appointment is expected to lead to a removal of forward guidance and signaling language rather than immediate policy shifts.
• There is currently little appetite for rate hikes despite higher inflation data, or cuts, creating a state of stasis.
• Conditions for a Rate Hike
  • A hike would require a simultaneous alignment of persistent inflation and a tightening labor market (declining unemployment).
  • The "house view" assigns only a 10% probability to a hike, contingent on evidence of sustained unemployment decline and high inflation into the summer.
  • Analysts argue that inflation alone is insufficient to trigger a hike without labor market pressure.
• Rate cuts are viewed as more likely to materialize towards the end of the year or into 2026, contingent on labor market softness resolving inflation quickly.

Global Currencies & De-dollarization

• The narrative of de-dollarization has "ebbed," driven by the robustness of US corporate earnings and the resilience of the US economy.
• The US dollar has remained flat year-to-date, acting as a "sideshow" rather than a primary market driver.
• Emerging market currencies, particularly China (CNH), are appreciating steadily due to favorable terms of trade and Euro funding.
• Dominic Wilson prefers a mix of the Australian dollar and Brazilian real, while Josh Shiffrin favors the Chinese currency based on its persistent upward grind.
• Shiffrin predicts a long-term trend of "dollarization" rather than de-dollarization due to US innovation and capital flow dominance.

Commodities & Energy

• The primary commodity narrative is the unresolved geopolitical tension in the Middle East, which keeps energy supply constraints active.
• Copper prices have rallied rapidly, signaling a broader growth reflation trade alongside rising bond yields and equities.
• Gold has not resumed its previous climb, contrasting with the performance of other industrial commodities.
• Hedging Strategy
  • Shiffrin advocates hedging risky assets directly rather than betting on oil price direction, noting oil's current price symmetry.
  • The most under-hedged risk is the "downside tail" from an energy resolution; if the Iran problem is solved, oil prices could fall significantly.
  • Analysts suggest that long-duration rate hedges (betting on lower rates in 2-3 years) are currently undervalued as the market has shifted focus away from disinflation.

Regional Market Performance

• Asia: Markets in Korea (Kospi), Taiwan, and Japan have broken out of cycle lows and are performing strongly, offering a mix of tech and commodity exposure.
• China: The CNH currency is appreciating, and the market appears to have "turned a corner" after lagging.
• Europe: The region is the outlier in the global recovery, lagging significantly behind Asia and the US.
  • The Euro-to-S&P ratio is approaching historical lows, suggesting potential for a mean reversion.
  • Europe remains a "tougher putt" compared to the previous year.

Credit Markets

• Credit markets are described as "tight," with analysts noting a lack of a traditional credit cycle in recent years.
• Dominic Wilson suggests that given the market's run-up, investors may not have sufficient downside protection in credit if a sharp downturn occurs.

Non-Market Discussion

• Josh Shiffrin is supporting the New York Knicks in the Eastern Conference Finals.
• Dominic Wilson's hobbies include spending time with a new family dog in New York City, cooking, and reading hardcover books to avoid digital distractions.