Wall Street snapped a three week win streak on Friday, despite the central bank delivering its first rate cut in nearly nine months, citing increased downside risks to the labor market. The final estimate of Q2 GDP growth was revised up to an annual rate of 3.8% from 3.3%, primarily due to increased consumer spending. Meanwhile, the Fed’s preferred inflation gauge—the core personal consumption expenditures price index—increased to 2.9% Y/Y in August, in line with estimates but still well above the central bank’s 2% target.
The question on investors’ minds – is the economy strong or weak right now? There have been many mixed signals in recent months, complicating the picture for investors, Fed policymakers, and everyone in between. A positive earnings season and the AI boom have boosted markets, consumer spending is resilient, and GDP growth is looking stronger than previously thought. On the other hand, the labor market slowdown is real, while inflation has remained above the central bank’s 2% target for nearly five years now, and sweeping tariffs could continue to push that figure higher.
For the week, the S&P 500 index slipped 0.3%, while the Dow fell 0.2%. The Nasdaq retreated 0.7%.
Future Wealth’s View
It appears to us that the world economy has yet to feel the full impact of the tariffs, but it’s coming, with the US economy beginning to show signs of slowing down from the impact of the tariffs. And, as the tariffs curtail global access to the US market, countries are beginning to flood the rest of the world with exports. That’s causing alarm in other regions, as governments ponder the potential damage to their domestic industries.
In the meantime, markets are moving higher primarily on the non-stop news of AI investments, specifically on the vast amounts of capital pouring into AI infrastructure. Even if the technology proves transformative, we believe that the billions of dollars pouring into AI buildout is too extreme with the eventual returns highly uncertain. And all of this is riding on hundreds of billions of debt being thrown into companies who are working on a vicious cycle of vendor financing.
Here is how circular vendor financing works – Nvidia said it will invest up to $100 billion in OpenAI and supply it with data center chips. OpenAI signed a contract with Oracle to purchase $300 billion in computing power over roughly five years. Oracle, in turn, has made a deal to spend roughly $40 billion on Nvidia chips. Each one of these companies have gone to the banks to fund these projects with debt using these circular agreements as collateral.
Didn’t we see this movie before in the Telecom bubble of 2001?