Wall Street Is Not Pricing in AI Productivity Yet: Stocks Look Even Cheaper

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The analysis suggests that the market is in a mid-cycle transition phase, with AI adoption showing up in fundamentals and supporting earnings. While the S&P 500 has made little headway since June, the underlying market breadth has deteriorated, suggesting that the recent narrowing is more about additional tightening being discounted rather than a broader market issue. The author agrees that stocks should be higher without certain anchors, suggesting that the market may be overlooking risks. Bond yields have moved higher, with the 2-year yield up significantly, and the yield curve is exhibiting an overly hawkish posture. The analysis highlights that while the market may be assuming too many rate hikes over the next year, the Fed may be misjudging willingness to use the balance sheet to either fund deficits or stabilize financial conditions. The author believes that Warsh's hawkish stance on inflation, determined more by money supply growth than fiscal sustainability, is a key signal. The analysis concludes by noting that markets are aware of headwinds but have elegantly solved for them via lower valuations and significant rotations, with AI enabling further rotation and quality leadership. A list of 'Fresh Money Buy List' stocks is provided, indicating potential bullish opportunities based on their fundamental performance and sector.

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