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The strangest standoff in the market… why liquidity is keeping a lid on your gains… the framework for when it will end… if bond yields fall, ask why… follow the earnings, not the multiple… how to invest in this market
For nearly four months, the AI trade has been stuck.
Not falling apart. Not melting up. Just… stuck – chopping sideways, week after week, going nowhere.
You can see this in the Global X Artificial Intelligence & Technology ETF (AIQ), a proxy for the AI trade. As I write on Thursday, it’s trading at essentially the same level as the first week of May.
This would be unremarkable if AI businesses themselves were treading water too. But they’re not.
Over those same four months, nearly every fundamental that’s supposed to move these stocks has moved the right way. Revenues have soared. Backlogs have swelled. Spending plans have climbed. Earnings estimates have marched steadily higher.
This leaves us in a strange situation: fundamentals keep improving while Wall Street ignores them. The gap between how these companies are performing and how their shares are performing has widened – and it refuses to close.
When reality and market prices disagree this loudly, for this long, it’s time to find the reason.
That’s what our hypergrowth expert Luke Lango of just did. And his answer likely isn’t the one you’re expecting.
It’s not an earnings problem
Luke starts by zeroing in on what we just covered: the problem isn’t the “E” (earnings) in the P/E Ratio. It’s the “P” (price):
This is not an earnings problem. It is a divergence — fundamentals moving north while prices move east, creating an unusually large gap between economic reality and market performance.
If earnings are climbing while prices flatline, that means something is pushing valuations down at the same rate earnings are pushing them up. Luke’s candidate for that something is a concept that isn’t on most retail investors’ radar, but the serious money watches it closely: excess liquidity.
Back to Luke:
The best explanation for this divergence is collapsing excess liquidity — the growth in money supply left after accounting for inflation and real economic growth…
When excess liquidity is positive, surplus real money flows into financial assets, supporting higher prices and valuation multiples.
When excess liquidity disappears, earnings must do all the work alone.
To make sure we’re all on the same page, excess liquidity is the spare money sloshing around after the economy has taken what it needs to grow, and inflation has taken its cut.
When there’s a surplus, it must go somewhere – and a lot of it washes into stocks, lifting the price investors will pay for a dollar of earnings. Think “sentiment” – bullish investors feeling optimistic about the market, being willing to pay up for earnings with these excess dollars.
But when that surplus dries up, there’s no extra tide lifting valuations. Earnings can still grow, but the multiple stops expanding – or starts shrinking. And right now, per Luke, that tide is going out fast:
Per Bloomberg’s calculations, excess liquidity in G10 economies is in the middle of its biggest crash since the COVID pandemic…
Excess liquidity actually flipped negative in June — right around when the real chop began.
So, we have great AI earnings while also facing draining liquidity, and the two are fighting to a standstill.
No one knows when this will reverse. So, rather than predicting, Luke offers a concrete dashboard for spotting when the squeeze starts to ease:
Watch for: any credible signal of Hormuz reopening or a genuine diplomatic breakthrough (not just another round of talks); oil sustaining a move back below $80; the 10-year yield rolling back below 4.7% and then below 4.5%; September rate-hike odds falling meaningfully from current levels; and any shift in Warsh’s public language toward ‘balanced risks’ rather than pure inflation-fighting rhetoric.
Of that list, my focus goes straight to the 10-year Treasury yield. It’s the hinge.
Nearly everything else – oil, rate-hike odds, the Fed’s tone – feeds into it. Which raises the obvious question…
Is that yield going to fall and remain low?
Why the rescue may not come – and why the reason matters more than the move
For this part of the story, let’s turn to Tom Yeung, Eric Fry’s right-hand man in .
In Tom’s latest research piece, he did a deep dive into the bond market. His read calls into question the idea that lower-for-longer yields are just around the corner.
Tom starts by pointing out that 30–year bond yields hit 5.3% last week – their highest point since 2007. But while a long-term chart of the 30-year reveals that 5.3% isn’t exceptionally high, Tom points toward what’s different today:
The U.S. government is not in the same financial situation as it was in the early 2000s. Our debt loads are far higher today, raising the net amount of interest Washington needs to pay out…
Gross federal debt now runs at 123% of GDP. That means America’s federal interest burden is now more than twice as high as it was in the “good old days.”
And the trajectory is worse than the snapshot.
The Congressional Budget Office now expects the federal government to spend roughly $1.35 for every $1 of tax receipts for the foreseeable future, which is as unsustainable as it sounds.
Washington knows this. As we’ve covered in the Digest, Treasury Secretary Scott Bessent recently announced plans to double Treasury buybacks.
The relief lasted about a day. As Tom explains, bond investors saw the move for what it was – swapping long-term debt for short-term debt without reducing what’s actually owed.
Then Tom adds a wrinkle that ties directly back to Luke. The AI build-out isn’t just competing for chips and electricity. It’s competing for capital – in the bond market, against the U.S. government itself:
Total U.S. corporate bond issuance reached $1.68 trillion through July, up 27% from the same period last year, according to SIFMA Research.
Every dollar invested in those bonds is a dollar that cannot also be invested in Treasuries.
Normally, a flood of corporate borrowing like that forces companies to pay investors a bigger premium over “risk free” Treasuries. This time, that premium – the spread – has barely budged. So, the pressure shows up somewhere else.
As Tom puts it:
Investors are not demanding more compensation to lend to corporate America. Instead, they are demanding more to lend to the U.S. government.
Now, from here, Tom isn’t predicting even higher Treasury yields. But what we can say is that this dynamic doesn’t cleanly support lower yields.
And even if they do fall, Tom points toward the bigger question that connects his and Luke’s analysis…
Why would they be falling?
Yields can come down the good way, as Luke is envisioning – a genuine easing of oil and inflation pressure, resulting in a soft landing. Or they can come down the ugly way, as Tom warns about.
Here he is on that second path:
The AI trade unwinds sooner than we expect. That would send corporate spreads sharply higher and Treasury yields lower as capital flees to safety. But that would be like trying to lose weight by using a tapeworm…
The resulting “cure” for high Treasury yields would also trigger a collapse in AI stock valuations, causing an even deeper selloff of corporate bonds, and a further selloff in equities.
Same falling yield. Opposite outcome for your portfolio.
So, with no crystal ball to tell us how this will resolve, what’s our next step?
Follow the demand, not the multiple
Luke says the AI trade’s problem is a shrinking multiple (based on liquidity), not shrinking earnings.
Tom says you can’t count on falling rates or cheaper money to re-inflate that multiple – and that if rates do fall for the wrong reason, the most stretched, most leveraged names get hurt worst.
Both ideas are basically telling us the same thing: stop betting on the multiple. Stop needing the tide to come back in.
Instead, own the companies that get paid regardless – businesses whose case rests on real, contracted, volume-based demand rather than on sentiment paying up or the Fed riding to the rescue.
To be clear, the market may not immediately reward them with higher prices (due to the liquidity issue and macro overhangs), but this is still the best place to be.
So, how do you spot these companies?
Look for three things: the business already makes real profits today, not someday… it isn’t buried under debt that high interest rates can crush… and it sells something its customers can’t easily stop buying. A business like that doesn’t need Wall Street’s mood to lift to keep making money.
This principle reaches well beyond AI. For example, in , Tom and Eric are positioning themselves based on “higher for longer” oil and healthcare, with Tom characterizing their take as “very bullish.” These are two corners of the market where demand holds up no matter what the Fed does.
For Luke, he’s urging investors to look beyond the most popular AI names to the layer of suppliers and component makers underneath them that no build-out can proceed without.
We’re talking about the companies that get paid on volume as the whole thing expands, whether or not liquidity floods back, and whether or not the 10-year cooperates.
Luke has been building out . Here’s how he describes his guiding principle:
I follow the problems… which problems get bigger?
And which relatively small suppliers solve those problems – and suddenly find themselves selling a lot more equipment to some very large customers?
He’ll be laying it all out – three analysts with very different styles who’ve landed in a surprisingly similar place.
Luke will even hand over the name and ticker of one company for free. If the “follow the demand, not the multiple” idea resonated today, that’s where you’ll get more specifics on how – and the specific stocks – from Luke. .
So, where does all this leave us today?
The fact that Wall Street won’t reward all these great AI earnings isn’t the end of the story. It’s the opportunity.
Right now, per Luke, the flow of money in the system is setting prices, not how the businesses are actually doing. So, the market is lumping the strong companies in with the weak ones and limiting the returns of just about all of them.
This won’t last forever.
If the market stays stuck, a company that keeps growing its earnings gets more valuable anyway. Sooner or later, a bigger business is a bigger business, and the price must catch up. You get paid for being patient.
If things turn ugly and rates fall for the wrong reason, the steady earners are the ones that hold up best, while the stretched, debt-heavy names take the worst of it.
And if the money starts flowing freely again, fundamentally-strong stocks get an extra push on top of it all.
Three different roads – and the same kind of company is where you want to be invested in every one of them. That’s why owning businesses with earnings strong enough to keep growing on their own is where you want to be today.
Don’t want to wait for next week for specific ideas?
There may be no purer “get-paid-regardless” play than copper.
The AI buildout physically can’t happen without it – data centers, power lines, and grid connections all require it – so that demand doesn’t much care what the stock market’s mood is. And right now, demand is slamming into a supply wall. Copper is heading for its first real shortage since 2009, and a new mine takes seven to 10 years to build, so miners can’t catch up any time soon.
Plus, there’s a policy catalyst on top of it. Washington is weighing a tax on imported refined copper, with a decision due by January 2027 – and the smart money is already moving.
Buyers have stockpiled a record 650,000 tons in U.S. warehouses to get ahead of it. Copper is up 36% over the past year, and Goldman Sachs figures it could reach $14,000 a tonne if the tax lands.
So, how do you play it?
Our trading expert Jonathan Rose, editor of , broke it all down on – the AI-driven squeeze, the tariff decision, and which copper names are positioned to win (plus the ones that look right but aren’t).
Jonathan publishes these free MIT Live videos every day that the market is open at 11 a.m. ET. He profiles market trends, explains entries and exits, discusses the opportunities he’s watching in real time, and offers plenty of tickers along the way. .
Have a good evening,
Jeff Remsburg
