How's the stock market doing, minus AI?

Kai Rizdal introduces the episode by questioning the common belief that the stock market is not indicative of the overall economy. He shares a personal anecdote about a sweatshirt with that message, emphasizing his long-standing view. However, he acknowledges recent signs suggesting a possible shift; stocks are increasingly contributing to household wealth, which influences consumer spending through the wealth effect. This is especially relevant as valuations of big technology companies involved in AI are pushing the stock indices higher, even though the broader market doesn't share this performance. Rizdal highlights that only a handful of stocks, such as Nvidia, Microsoft, Amazon, and Micron, have been driving record highs, while most remain stagnant or declining, revealing a significant bifurcation. Experts from Raymond James and Capital Advisors discuss how this small group of tech and AI-centric companies are skewing the market performance, especially after the Federal Reserve signaled imminent interest rate rises, which caused a rotation away from other sectors like housing and traditional consumer companies. This sets the scene for exploring whether the stock market's recent gains are sustainable or misleading.

The episode dives into how only a few companies, mainly the major tech giants and AI firms, are responsible for recent record highs in the S&P 500, while the majority of stocks are not performing well. Matt Orton from Raymond James explains that just 24 stocks out of 500 hit new highs recently, underscoring the concentration of gains. The discussion shifts to how interest rate hikes by the Federal Reserve—announced at the end of August—have impacted market sectors, causing stocks tied to housing, retail, and traditional industries to decline. For instance, homebuilders and food companies have seen significant drops. Meanwhile, the AI trade remains resilient, unaffected so far by rising interest rates or oil prices. The segment emphasizes the growing disparity in stock performance and suggests the market’s reliance on tech and AI stocks could be masking underlying economic weaknesses.

Kristen Schwab reports on upcoming corporate earnings, highlighting the importance of Q3 results from major banks and consumer goods companies. She notes that strong earnings from the second quarter have raised expectations for the rest of the year and into 2026, influenced partly by the IPO of SpaceX and rising oil prices. Bank analysts, including Rob Hayworth from US Bank, suggest that financial institutions will indicate whether consumers are still doing well amidst rising interest rates, but bank earnings may show some slowdown due to reduced lending. Consumer spending will also be examined through data from companies like Procter & Gamble and Kraft Heinz, with Schwab humorously noting consumer behaviors such as adjusting spending on basics like shampoo and toilet paper as economic indicators. The discussion implies that while overall spending might slowdown slightly, it is unlikely to cause a severe downturn, but signs of strain are emerging among lower-income consumers.

David Gray-Witter from the University of Texas discusses the complex AI supply chain, which involves multiple interconnected actors such as Nvidia, TSMC, Google, Microsoft, Amazon, and startup incubators. He describes it as a 'circular spaghetti'—a tangled, cyclical system where companies are both competitors and allies, depending on their positions. Gray-Witter explains that despite calls for regulation and codes of self-regulation by AI firms, the supply chain’s interconnected nature makes regulation difficult. The core concern is that existing harms of AI—ranging from safety issues to potential catastrophic risks—are embedded in this complex system, which is already heavily invested with hundreds of billions of dollars. He emphasizes that the collective action problem makes regulation a challenge because various players have competing interests—some want AI applications to expand, while others wish to reduce dependencies and maintain dominance. The segment concludes with Gray-Witter’s cautious outlook, stating that the current landscape is not optimistic about rapid or effective regulation, and highlights the systemic power and influence of major corporations in shaping AI development.

Megan Swiber from Bank of America Merrill Lynch provides an accessible explanation of the yield curve, describing it as the market’s expectation of Federal Reserve policy rates over time. She highlights that recent increases in bond yields reflect the resilience of the US economy, which continues to grow despite higher borrowing costs. Swiber notes that the market predicts the Fed will need to raise interest rates further to combat inflation, evidenced by the steepening yield curve. She discusses the significance of yield curve inversion—a situation where short-term rates exceed long-term rates—which historically signals a looming recession. Although inversion hasn't occurred recently, its potential presence alarms many due to past precedents. Swiber emphasizes that the bond market’s behavior indicates high confidence in economic growth, which raises concerns about inflation and the need for the Fed to keep hiking rates. She also values ongoing focus on bonds as vital to understanding economic trends.

Justin Ho reports on rising consumer debt, especially auto loans, which have seen delinquency rates at levels not experienced since the financial crisis. Auto loan payments are increasingly late, with times extending from 30 to 45 days overdue. Loan officers at banks explain that consumers are prioritizing auto payments because they rely on their cars for daily activities. Automotive prices have surged by about 41% since the pandemic, leading to higher monthly payments—averaging $765 for new cars and $600 for used cars—often unaffordable for lower-income households. The episode indicates that these rising delinquencies are signs of strain in the K-shaped economy, where the upper-income and financially stable populations continue to spend, while those struggling face greater difficulties maintaining payments. The segment suggests that increased defaults could foreshadow broader consumer financial stress if trends persist.

The episode concludes with a brief story about Levi Strauss reporting profits but experiencing the slowest direct-to-consumer growth in four years, attributed to a focus on baggy jeans over trendy low-rise. The CEO noted a strategic shift towards ‘loose’ styles. This anecdote underscores the subtle shifts in consumer preferences and their impact on corporate fortunes. The narrative ties back to themes of economic resilience and shifting consumer behaviors, suggesting that while some companies and consumers adapt, underlying tensions and disparities persist in the broader economy. The episode closes with thanks and an invitation to explore more content from Marketplace.