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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Good morning. Last night’s Nvidia results were great, so the market will not have a complete meltdown today. Whether or not this dispels worries about unprofitable over-investment in artificial intelligence (shouldn’t it make us worry more, in fact?), the moment of reckoning has been put off once again. Send us your thoughts: unhedged@ft.com.
The bull case
It’s been a jittery couple of weeks, and more and more investors and pundits (including Unhedged) are talking about downside scenarios and bear cases. So we thought it might be useful to lay out, in outline, the main reasons for risk asset bullishness about 2026 and what remains of 2025. Pushed to make the case, here are the points we’d emphasise, in descending order of importance:
Fiscal largesse. All the fun stuff in the Republicans’ “One Big Beautiful Bill” are frontloaded into the next few years — tax cuts and rebates for households, tax exemptions and incentives for business. The US fiscal impulse, which has been negative in the second half of this year (not least because of the shutdown) is going to turn positive next year. Below are the Brookings Institution’s estimates for quarterly boost to real GDP growth by quarter. To put it in more concrete terms, Principal Asset Management estimates that the average household will receive an extra $700 on their tax refund under the OBBB, while the investment incentives in the bill might push the effective corporate tax rate next year from 21 per cent to as low as 16 per cent.
An interventionist White House. Republicans are pushing back on President Donald Trump’s idea of $2,000 stimulus checks (“tariff dividends” to the credulous) for low- and middle-income families. But don’t count the idea out should things start to go sideways economically. There is a Trump put in the bond market, too: Treasury secretary Scott Bessent has made keeping the 10-year Treasury yield low an explicit priority, and we expect him to get very creative if it starts creeping towards 5 per cent. Finally, Trump has already chickened out on food tariffs. We expect more TACOing if tariffs, which have been broadly well tolerated to date, start to pinch elsewhere.
Big company profits are holding up very well. S&P 500 revenues rose solidly faster than inflation in the third quarter and margins are widening. And no, the Magnificent 7 are not doing all the work. Consider this chart from FactSet, or revenue growth by sector:
Big Tech is not that overvalued. Apple, Microsoft, Alphabet, Amazon and Meta trade at an average forward price/earnings ratio of 28. They also have a three-year compound average revenue growth rate of 11 per cent and some of the best business models in the history of capitalism. Costco trades at 45 times with a growth rate of seven. Do you hear anyone shouting about the Costco bubble? The market as a whole is undoubtedly overpriced and, yes, Nvidia is huge and will live or die on AI, but everyone needs to calm down.
Cheap oil. Oil is at $60! Don’t forget how stimulative that is (except for the oil business).
Tariff relief from the Supreme Court? If the SCOTUS throws out emergency tariffs, policy uncertainty will rise. But business despises the tariffs and some court-ordered sanity will probably boost confidence.
Does Unhedged actually buy all this? For the most part, yes, at least until next November’s midterm elections. But you will notice one item conspicuously absent from the above list: Federal Reserve rate cuts. Given the prominent place fiscal looseness and bond-market fiddling play in the bull case, deep rate reductions would be too much to hope for. The scariest risk, in our view, is not an AI meltdown but resurgent inflation, which could topple the very large, delicately balanced financial superstructure resting on top of the US economy. If core CPI goes back above 4 per cent, all bets are off.
Bitcoin
The crypto whiplash has been intense over the past few weeks. Bitcoin prices hit an all-time high of about $126,000 in early October. Less than a week later, Trump threatened “massive” China tariffs, the apparent catalyst for the liquidation of $20bn in leveraged crypto positions, the largest single-day sell-off on record. The wipeout in value has continued. Bitcoin is now trading at just above $90,000:
This leaves the cryptocurrency trading at the levels of way back in, er, April. Outflows from crypto ETFs have not been pretty either:
Bitcoin evangelists argue that the market’s “fundamentals” remain intact, and the sell-off only reflects liquidity concerns — mostly falling expectations of a December Fed rate cut. Here is Zach Pandl of Grayscale Investments:
This is much more a macro drawdown than a crypto-specific drawdown. I think [crypto] will be just as sensitive to things like the jobs report and the outlook for the December FOMC meeting than the news specifically to crypto . . . Since 2020, crypto has been more correlated with the macroeconomic cycle and events — think [like] oil, which is partly correlated with stocks and partly marches to the beat of its own drummer . . . But from a crypto-centric standpoint, I don’t think fundamentals have changed in a material way
And Juan Leon at Bitwise:
The largest driver right now is macro . . . Crypto is very rate sensitive. The second thing from a macro perspective is what seems to be a possible correction in the AI sector that is spreading across risk assets. . . Lastly, there is broad investor uncertainty about post-government shutdown data and distortions in upcoming economic prints.
There is a lot of truth in these views. Bitcoin is “closer to [the] Nasdaq than anything resembling medium of exchange or store of value”, Viktor Shvets at Macquarie Capital points out. A closer look shows that since 2020, Bitcoin and the Nasdaq travel together and their correlation has been high. Chart from HB Wealth:
According to Shvets, this can be explained by an increasingly close relationship emerging between AI, crypto, data centres and blockchain — which he likens to “an emergence of [an] American version of Japan’s keiretsu system of vendor, user and cross-shareholding relationship between companies”. The economics of these tech sectors and crypto is becoming increasingly interwoven.
It is worth remembering how far the picture just sketched is from the original promise of Bitcoin. It was the future of money; it was digital gold; it was an alternative to what the analogue financial system had to offer. Now, it looks like another leveraged financial asset, intertwined with the fate of the tech sector. But, producing no cash flows, it is unusually dependent on the vicissitudes of market liquidity and market mood. If such a thing did not already exist, would you invent it?
One good read
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