Politicians from both sides are targeting Big Tech's externalities, like rising electricity costs from AI data centers. This pressure signals a trend of forcing tech giants to bear costs for the "good of the system," effectively taking their "pound of flesh."
Seemingly opposing political ideologies are converging on economic policy. Trump's proposals on credit card caps and tariffs align more with progressives like Elizabeth Warren than traditional capitalists. This "horseshoe effect" suggests a broad move toward a state-supported, centralized industrial policy.
The central strategy in macroeconomics is to stifle volatility in foundational markets like bonds and foreign exchange. This engineered stability allows nominal GDP to outpace debt, effectively devaluing it over time. This delicate balance is most vulnerable to unpredictable geopolitical shocks that can shatter the low-volatility regime.
There are two distinct forms of economic stimulus. One targets financial markets, lifting asset prices. The other targets Main Street, boosting consumption. Because the latter demographic holds few financial assets, policies aimed at them may not translate into the market gains investors expect.
While large-cap tech stocks are showing weakness, cyclical sectors like small caps, consumer discretionary, and restaurants are breaking out. This suggests capital is flowing from concentrated, high-valuation names to broader, economy-sensitive assets, indicating a significant shift in market leadership.
Current market bullishness is at levels seen only a few times in the past decade. Two of those instances led to corrections within three months. This euphoria, combined with low volatility and high leverage, makes the market vulnerable to even minor negative news.
A critical divergence exists in the AI market: hedge fund exposure to semiconductor stocks is at record highs, yet the primary buyers of these chips—the Mag7 hyperscalers—are showing market weakness. This creates a precarious situation where the supply chain's valuation is detached from its end-customer strength.
Japan is experiencing a historic capital rotation. After decades of a bond-centric, "play not to lose" mentality that favored an aging population, the country is shifting capital into equities and other risk assets. This is driving its stock market to new highs and reflects a fundamental need to finance new growth industries.
The market's "run it hot" narrative assumes supportive monetary policy, but the Fed is unlikely to cut rates before the current chair's term potentially ends. With a new chair possible in June, this creates a four-month window where the Fed may not ease, creating a "liquidity pocket" and risk for markets.