Sneak Preview of 2027

Its getting real.  They hit the heart of the US stock market this week.  AI is the heart of both the stock market and the economy.  The financialization of the US has made the stock market the de facto economy.  That is why you saw the bid in Treasuries, despite the hot CPI and PPI numbers.  When investors sense weakness in the AI boom, it doesn't take a genius to connect it to the economy, and thus bond yields.  Going forward, expect a reversal of the positive correlation between stocks and bonds.  The 2022-2023 playbook is useless for this market.  It will lead investors astray during the AI bust.  We're in the 2000-2002 playbook, where tech stock weakness leads to bond market strength.  

Credit spreads for AI data center stocks are blowing out and investors are starting to question the sustainability of the AI capex boom.  Last month, Anthropic delayed its IPO, which was initially planned for October into November/December.  Firmus, an AI data center company, scrapped its $5B IPO plans this month, when there wasn't demand at a $30B valuation.  

The hot topic of the weak, CRWV credit spreads, are blowing out.  

AI data center bonds steadily weakening since July.

The hyperscalers have gone into negative free cash flow at current spend levels.  In order to have further growth from current capex, additional capital will need to come from equity/bond investors.  It appears that even at these higher yields, there just isn't as much demand as most expected from bond investors.  As for equity capital, if you push valuations to nosebleed levels, IPO buyers think twice about whether they can even flip  for a profit.  That's why you are seeing AI IPOs getting delayed.  After seeing how the SPCX IPO played out, people are realizing the upside is limited when you IPO at ridiculous levels.  There aren't enough speculators out there to chase these AI stocks at crazy valuations.  Those gamblers have already gorged themselves on AI names, and have little room to add more bags to their portfolio.  

Musk has front run the crowd brilliantly by taking up a huge chunk of equity capital before the other big AI players were ready to come to the money trough.  Now, Anthropic and Open AI will probably have to IPO at lower valuations than they want to, in order to attract enough initial bids.  

The parabolic phase of the AI bubble has ended.  The NDX is now 4 months into the choppy, messy, and sometimes violent sideways range that form a long term top.  For the SPX, it has been 2 months since the initial top just above SPX 7800.  The length of the choppy, range bound phase varies for each bull market.  The following are some bull market top charts for reference.  

SPX 2000 Top

SPX 2007 Top

SPX 2015 Top

SPX 2018 Top

SPX 2022 Top

SPX 2026 YTD

2000:  Initial top in late March.  Range bound phase (5 months) until final top in early September.  

2007:  Initial top in mid July.  Range bound phase (3 months) until final top in mid October.  

2015:  Initial top in late November 2014.  Range bound phase with only marginal higher highs until final top in late July (8 months)

2018:  Initial top in late January.  Range bound phase with margin higher highs until final top in early October (8 months)

2022:  Initial top in early November 2021.  Range bound phase (5 months) with marginal higher highs until final lower high top in late March.

2026:  Initial top in August 2026? Range bound phase (2+months) until final top in ?

YTD inflows into tech funds $142B, with 2.5 months left in the year.  

The market has been very complacent about the AI boom.  Huge growth for the next few years is viewed as a sure thing.  It wasn't like this in 2025.  In 2025, there were still lots of doubt about AI end demand and monetization.  The memory mania was just getting started.  Now, every fast money investor and speculator is bulled up on semiconductors and DRAM.   It is the worst possible setup for bulls, as a heavily saturated market with high expectations faces huge disappointments.  

This past week is a sneak preview for the main event in 2027.  2027 should finally usher in an extended bear market coming from the AI bust, as OpenAI and Anthropic have trouble paying off their debt obligations as it grows with each AI data center launch (many more scheduled in 2027 and 2028 compared to 2026).  That should percolate down the chain to the semiconductors, AI hardware and power providers.

Previous scares such as the yen carry trade in August 2024, the tariff fears in February-April 2025, and the Iran war in March 2026 were tangential to the main theme.  The main theme being AI.  This is the first time since the start of the bull market where the scare is coming from the heart of the market.  Open AI expected revenues lowered, CXMT tech breakthrough news in the HBM market, and Coreweave and AI data center credit spread blowout.  This is not something that can be just shaken off and ignored.  Too many AI speculators are losing money.  They've been bleeding heavily since June, and its just gotten worse.  

Despite the ominous signals coming from the market, Its likely that you will get a bottom sometime in late October.  But don't expect a big, extended bounce like you saw coming after the late March bottom.  I would expect the next rebound to last less than a month, with marginal highs at best for the NDX.  

Just based on the calendar, how late it is in 2026, I don't expect any big moves to the downside until early 2027.  The market is still up over 10% on the year, with 2 months left in 2026.  Money managers don't have urgency to sell off their equity holdings at year end, which would bring foward capital gains taxes by one year.  So its rare to see a market go down hard into year end when its up that much in mid October.  You did see a rare 4th quarter selloff in 2018 which crushed the market, but the market was never up more than 10% on the year, and spent most of the year +/- 5%.  There will likely be a golden opportunity to put on big short positions with high conviction in late December, to front run the delayed capital gains selling, as well as the coming AI bust which should begin to play out in earnest in early 2027.

You saw some interesting moves in the bond market this past week.  It caught me off guard, as I expected a hotter CPI number to keep bond yields higher.  But the ferocious selloff in AI rendered the CPI number as meaningless, and the Fed funds futures are now only pricing in about a 15% chance of an October hike.  It was as high as 60% odds right after the CPI number came out.  Much of the move higher in Treasuries, especially the long end, felt like short covering as CTAs are heavily short.  Its becoming clear that Treasuries are now likely to be an inverse Nasdaq trade for the next couple of years.  It will catch some bond traders off guard who are still focused on inflation, instead of AI.

Put on shorts in both stocks and bonds in the middle of the week.  Took the loss on bonds but holding short in SPX.  Should have shorted NDX but what a bit chicken little as I didn't have a premium entry.  Looking for initial downside target of SPX 7600, and then 7550 if downside momentum picks up.  Not looking for a big move lower, so playing smaller size.  The risk/reward for shorts should be much better in 2027.