The Outlook Is Better Than the Headlines Suggest

We updated our core models this week. You can review the trade updates here.

The short version: We remain optimistic. In our opinion, the economic outlook is much better than the news would have you believe, and fears of an imminent AI collapse seem unwarranted.

There are dozens of supporting charts, but below are the four I find the most interesting:

On the Economy

Most of the benefits of this year’s tax bill are going to be recognized over the first few quarters of next year. And as much as the news talks about the tax benefits to the rich, the average refund per worker next year is expected to be $3,225, a 43% increase over 2025.

On AI

Bubbles occur when prices climb to irrational heights. That isn’t what we’ve been seeing.

As noted in the chart on the left, the valuations for the Mag 7 stocks - Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – have moved astronomically higher because their earnings have moved astronomically higher.

If you are waiting for spending on AI infrastructure to stop once these companies run out of money, I wouldn’t hold your breath.

As these charts show, despite their capital expenditures, Google, Amazon, Meta, Microsoft, and Oracle still have $160 billion in free cash flow.

Finally, it is important to put today’s AI spending in a historical context. Today’s AI spend is significant but still relatively small when compared to the capital expenditures made to support previous transformative innovations such as telecom, hardware, cars, and railroads.

Now for the important disclaimer:

None of this means stock prices won’t go lower. In the short run, anything is possible, and every financial plan should be built on the assumption that bad things will happen.

Unexpected events occur and markets change quickly. But that is always true, and no forecast should ever be taken as a guarantee of future results.

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Personal Note:

Thank you to those who came to last week’s event at Eddie V’s. Austin, Crystal, and I had a great time seeing everyone, and we look forward to doing it again next year.