Cracks Beneath the AI Boom: Is the U.S. Economy Heading For a Downturn?
The big story of the week in New York was that Zoran Mandami became mayor. He’s an avowed socialist and plans to freeze rents. Markets didn’t react much to the news, likely because New York real estate investment trusts have already fallen significantly this year. Take SL Green, a large office property REIT—it’s already down about 25 percent.
The Mandami story, in my view, is just getting started. There are already reports of Wall Street firms exploring moves to Dallas. I’ll be watching that closely in the coming weeks.
1. Markets Stay Near Highs Despite Volatility
Despite all the movement this week, the market is still not far from the all-time highs we saw last week.
Here’s how the week played out:
On Tuesday, the NASDAQ fell over 2 percent as concerns about inflated AI valuations hit sentiment.
The market rebounded on Wednesday.
Then it dropped again on Thursday, following weak job cut data.
There’s growing evidence that the labor market is cooling. Because of the government shutdown, we don’t have official reports, so investors are relying on private data. The Challenger report showed that companies announced the most job cuts for any October in more than 20 years.
That data sent markets lower on Thursday, while bonds rallied. Overall, it’s been a volatile week.
2. A K-Shaped Economy
We continue to see what I call a K-shaped economy.
The top 10 percent of households are responsible for almost half of all consumer spending.
Meanwhile, lower- and middle-income consumers are struggling and cutting back.
This imbalance makes the US economy more vulnerable to a downturn, particularly if the stock market experiences a deeper correction.
3. A Narrow Market Rally
Let’s look at what’s really driving the market.
As of Monday, November 4 (before the Tuesday correction):
The S&P 500 was up about 16.5 percent for the year.
The NASDAQ was up a bit more than 23 percent.
Both of these are weighted indices, meaning the largest companies have an outsized impact. To see how broad-based the rally actually is, I like to look at the S&P 500 Equal Weighted Index (SPW), which gives every company the same weight.
As of Monday, SPW was up only 6.9 percent for the year. That’s almost a 1,000 basis point gap between the S&P 500 and its equal-weighted version.
Interestingly, that gap is roughly the same as we saw in both 2023 and 2024. So we’re now in a three-year stretch where big-cap tech is driving almost all of the returns.
Why is that happening? It’s simple. The top 10 companies by market cap represent 42 percent of the entire S&P 500 index. Only two of them, Berkshire Hathaway and JP Morgan aren’t tech stocks. The other eight are all tech.
The S&P 500 is extremely top-heavy. This concentration, combined with the underperformance of the equal-weighted index, shows how uneven both the economy and the market really are.
4. AI Stocks: Strong Stories, Weak Reactions
This week’s earnings season slowed slightly from last week, but the trend is the same. The AI story remains strong, yet the stocks didn’t react well because valuation concerns are front and center.
While most companies beat estimates, analysts have finally caught up, so the “beats” weren’t as dramatic as before.
Here are a few highlights.
Palantir (PLTR)
Reported $0.21 EPS vs $0.17 expected, and $1.18B revenue vs $1.09B expected.
Guidance was solid, and performance is strong on both the government and commercial sides.
Despite that, the stock fell 7 percent because of valuation concerns.
2026 P/E: Over 200x
Price-to-sales: 75x
When you live at that altitude, it’s not enough to beat expectations, you have to crush them.
Michael Burry reportedly took a big short position in Palantir, which didn’t help sentiment.
I personally don’t short stocks just because of valuation. I’ve learned that lesson the hard way. Valuation shorts usually end badly unless you catch a correction perfectly, which is incredibly hard in a bull market.
AMD
Delivered 30 percent EPS growth and 36 percent revenue growth ($9.3B vs $8.7B expected).
Guided revenue slightly higher but kept gross margin guidance flat.
The market wanted more, so the stock traded lower.
Arista Networks (ANET)
Reported 25 percent EPS growth, slightly above expectations.
Guidance was only in line, and at 40x forward earnings, that wasn’t enough.
Shares fell after the report.
Super Micro
Missed reduced estimates and issued weak guidance.
Shares fell 9 percent.
Their problem is that their products aren’t proprietary, which exposes them to price pressure.
If you don’t sell something unique, you eventually get caught in price wars.
Eaton
Missed slightly on revenue and gave conservative guidance.
Despite being a major player in industrials and data center buildout, shares dropped 7 percent.
Expectations were just too high.
Gartner
Reported solid numbers and raised guidance, but no one cared.
Investors are scared AI will make consultants obsolete.
Stock fell again and is now down 53 percent for the year. That’s ugly.
5. Outside of AI
Uber
Beat on revenue, missed on earnings, and guided cautiously for Q4.
Stock dropped 6 percent.
Long term, the big question is how Uber transitions to self-driving cars, but that’s still a long way off.
PJT Partners
Reported a 37 percent revenue increase and nearly doubled EPS.
We are in the middle of an M&A advisory boom, and PJT is benefiting from that.
Full disclosure: I own PJT.
Apollo Global Management
Reported strong results.
Fee-related earnings rose 23 percent to $652M and AUM hit $900B.
Stock was up 7 percent on the day.
The only worry here is the massive growth in private credit. When a recession hits, we’ll find out who took too much risk. But that’s not today’s problem.
Restaurants
Cava cut its full-year forecast again as younger consumers visit less often.
Chipotle showed similar weakness last week.
Papa John’s missed across the board and fell further after Apollo withdrew its buyout offer.
Healthcare
Novo Nordisk lowered its forecast again due to weak obesity drug sales.
Shares fell 2 percent while Eli Lilly rose 1.5 percent.
Lilly clearly remains ahead in this space.
Housing and Autos
Trex, which sells composite decking, missed estimates badly and dropped 31 percent in a single day.
CarMax CEO stepped down, and the stock dropped another 20 percent. It’s now down 50 percent for the year.
Weak housing and used-car markets continue to drag these names lower.
6. FICO and the Credit Bureaus
FICO reported fine numbers but gave weak guidance. In my view, the company got greedy. It used to charge lenders $5 per credit score, but it raised that to almost $10. That move backfired. Lenders and regulators, especially the FHFA, are pushing back.
Now, VantageScore, created by the three credit bureaus—Experian, Equifax, and TransUnion—is gaining traction as a cheaper alternative. That means FICO may be facing a price war with its own data suppliers, which is a dangerous position to be in.
This story is evolving, and I’ll be following it closely.
7. Mailbag: How Fractional Banking Works
A viewer asked how depositing money in a bank creates more money in the system. Here’s how.
If I deposit $100,000, the bank has to hold about 10 percent in reserve. It can lend out the remaining $90,000. That money is usually deposited into another bank, which can then lend out $81,000.
This process continues again and again, multiplying the total amount of money circulating in the economy. It’s not magic, it’s how the banking system is designed to work.
8. Final Thoughts
It’s been a volatile week, but the market is still holding up near its highs. Underneath, though, I’m seeing more signs of stress, particularly among middle-income consumers. The AI trade remains strong, but valuations are stretched, and investors are becoming more selective.
I’m watching four things closely:
AI valuations and how long they can defy gravity.
Signs of a weakening labor market.
The concentration of consumer spending among the wealthy.
The developing FICO versus VantageScore story.
And of course, I’ll be keeping an eye on the Mandami situation in New York. That one could have longer-term consequences.
Thanks for reading this week’s wrap.
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This post is for informational purposes only and does not constitute investment advice. Please consult a licensed financial adviser before making investment decisions.
